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Insurance, Weather, and Financial Stability
Kahn, Charles M.; Panjwani, Ahyan; Santos, João A. C. (2024-05-01)
In this paper, we introduce a model to study the interaction between insurance and banking. We build on the Federal Crop Insurance Act of 1980, which significantly expanded and restructured the decades-old federal crop insurance program and adverse weather shocks – over-exposure of crops to heat and acute weather events – to investigate some insights from our model. Banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980, even when affected by adverse weather shocks. Further, while they increased risky lending, they were sufficiently ...
Staff Reports , Paper 1107

Working Paper
Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies
Oh, Sangmin; Sen, Ishita; Tenekedjieva, Ana-Maria (2022-10-03)
Homeowners’ insurance, a $15 trillion market by coverage, provides households financial protection from climate losses. Insurance premiums (rates) are subject to significant regulations at a state level in the United States. Using novel data on filings made by insurers to regulators, we propose a metric to quantify the extent of regulation in individual states. We provide evidence of decoupling of insurance rates from their underlying risks and identify regulation as a driving force behind this pattern. Rates are least reflective of risk in states we classify as "high friction", ...
Finance and Economics Discussion Series , Paper 2022-064

Working Paper
Lending Standards and Borrowing Premia in Unsecured Credit Markets
Dempsey, Kyle; Ionescu, Felicia (2021-06-24)
Using administrative data from Y-14M and Equifax, we find evidence for large spreads in excess of those implied by default risk in the U.S. unsecured credit market. These borrowing premia vary widely by borrower risk and imply a nearly flat relationship between loan prices and repayment probabilities, at odds with existing theories. To close this gap, we incorporate supply frictions – a tractably specified form of lending standards – into a model of unsecured credit with aggregate shocks. Our model matches the empirical incidence of both risk and borrowing premia. Both the level and ...
Finance and Economics Discussion Series , Paper 2021-039

Report
Patterns of rainfall insurance participation in rural India
Gine, Xavier; Townsend, Robert M.; Vickery, James (2007)
This paper describes the contract design and institutional features of an innovative rainfall insurance policy offered to smallholder farmers in rural India and presents preliminary evidence on the determinants of insurance participation. Insurance take-up is found to be decreasing in basis risk between insurance payouts and income fluctuations, higher among wealthy households, and lower among households that are credit constrained. These results match predictions of a simple neoclassical model appended with borrowing constraints. Other patterns are less consistent with the benchmark model. ...
Staff Reports , Paper 302

Working Paper
Are the Borrowing Costs of Large Financial Firms Unusual?
Zarutskie, Rebecca; Anderson, Christopher; Ahmed, Javed I. (2015-03-12)
Estimates of investor expectations of government support of large financial firms are often based on large financial firms' lower borrowing costs relative to smaller financial firms. Using pricing data on credit default swaps (CDS) and corporate bonds over the period 2004 to 2013, however, we find that the CDS and bond spreads of financial firms are no more sensitive to borrower size than the spreads of non-financial firms. Outside of the financial crisis period, spreads are more sensitive to borrower size in several non-financial industries. We find that size-related differences in spreads ...
Finance and Economics Discussion Series , Paper 2015-24

Working Paper
Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans
Glancy, David P.; Kurtzman, Robert J.; Loewenstein, Lara; Nichols, Joseph B. (2021-12-17)
We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans have rate spreads that are at least 20 basis points lower and loan-to-value ratios that are around 3 percentage points higher than non-recourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, ...
Finance and Economics Discussion Series , Paper 2021-079

Working Paper
The Resolution of a Systemically Important Insurance Company during the Great Depression
Rose, Jonathan D. (2016-02-05)
This paper explores the economic issues related to systemically important insurance companies, using an example from the Great Depression, the National Surety Company. National Surety was a large and diverse insurance company that experienced a major crisis in 1933 due to losses from its guarantees of mortgage-backed securities. A liquidity crisis ensued, as policyholders staged a massive run on the company, demanding the return of their unearned premiums. The New York State Insurance Commissioner stepped in with a reorganization plan that split the company in two, out of fear that a ...
Finance and Economics Discussion Series , Paper 2016-5

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