Homeowners Insurance and Monetary Policy Transmission

This research article documents a novel transmission channel of monetary policy through the homeowners insurance market. It outlines how contractionary monetary policy shocks lead to increased homeowners insurance prices, driven by financial frictions and the interest rate sensitivity of insurers' investment portfolios. The study utilizes granular data on insurers' balance sheets to demonstrate that rate hikes reduce the market value of insurers' assets, tightening their balance sheet constraints and increasing their shadow cost of capital. As a result, these frictions amplify the effects of monetary policy on real estate and mortgage markets, making housing less affordable. The findings indicate that the impact of monetary policy shocks on home prices and mortgage applications is more pronounced in areas where local insurers are sensitive to interest rates, particularly in regions facing high climate risk exposure. This research highlights the significant role of insurance markets in amplifying macroeconomic shocks and their interconnections with residential real estate and mortgage lending.