The Hidden Effects of Climate Risk: Rising Insurance Premiums Increase Mortgage Delinquency and Drive Relocation to Safer Areas

Department: Finance

Speaker: Shan Ge (New York University)

Room: TBD

Abstract

As climate change intensifies natural disasters, homeowners' insurance premiums are rising dramatically. Using novel data on insurance policies for 5 million borrowers, we examine how premium increases affect mortgage performance, relocation decisions, and credit outcomes. We find that higher premiums increase both mortgage delinquency and prepayment probabilities. Results are robust using a novel instrumental variable. The prepayment effect is driven by relocation: larger premium increases trigger households to move to safer areas, reducing their subsequent insurance costs. The delinquency effect is concentrated among financially constrained borrowers and occurs across GSE and non-GSE mortgages. Higher premiums also increase credit card delinquency and deteriorate creditworthiness. Our findings reveal how climate change threatens household financial stability and potentially impacts financial system resilience through insurance costs, while showing how households mitigate effects through relocation to lower-risk areas.