Kyeonghee Kim; Florida State University

Abstract: In this study, we examine the effect of capital regulation on insurers’ pricing behavior using homeowners’ insurance price data. We leverage a regulatory reform that imposes greater regulatory capital costs for insurers to provide property coverage in catastrophe-prone areas. We first document that the regulatory capital reform had a meaningful impact on insurers—on average, regulatory capital ratios appear to decline by 50 percentage points. Using a difference-in-differences design and homeowners insurance prices, we find empirical evidence that the reform results in price increases, though the magnitude of the increases is restrained. Taken together with the size of the homeowners’ insurance market, our back-of-the-envelope calculation suggests the increase in insurance price is commensurate with 7-14% of the increase in regulatory capital costs due to catastrophes. We also find that the increase in price is larger for insurers with greater regulatory capital constraints or less access to reinsurance markets. Overall, our study provides evidence that climate-related regulation costs can be passed on to consumers.