The Capitalization of Insurance Premiums in House Prices

http://onlinelibrary.wiley.com/doi/10.1111/jori.12041/abstract

Abstract: This study uses Miami-Dade County, Florida home sales, and Citizens Property Insurance Corporation data for the period 2004 through 2009 to measure the capitalization effect of increases in premiums on house prices. Using hedonic pricing models, spatial autocorrelation models, and difference-in-differences models, we find that new information was conveyed to homeowners in the higher risk areas by the 2004/2005 storms and that consumers appear to use the insurance premium as a “risk signal.” We also find some support for the hypothesis that the risk of potential hurricane losses is communicated to potential homebuyers through windzone maps.

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[From] 2000 through 2010 homes sold for an average price of $312,312 with a minimum price of $50,000 and a maximum of $16,800,000.... Homeowners during this time period spent an average of $2,600 per year for property insurance with premiums as high as $180,000 per year.... The changes in insurance premiums were dramatic: the one- and two- year changes were negative in some years and nearly $1,000 (43% increase for one year and 69% for two years in percentage terms) in 2006....

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There is no evidence to support H1, a blanket reduction in house prices due to a re-evaluation of risk following the 2004/2005 storm seasons. To test the second hypothesis, controls for location within higher windzones are included in the models. It appears that the support for the second hypothesis is mixed. The parameter estimate for the 140 MPH windzone is negative and significant, but the parameter for the 150 MPH windzone is positive and significant.

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The coefficient on PctΔPremL1 is negative (-0.0618) showing that the one-year increase in premium leading up to the sale had an adverse impact on selling price. The coefficient is -0.0618, indicating that a 100 percent increase in the premium would result in a .0618 decrease in the log price of the average house. In other words, a premium increase of $2,602 (100% increase in average premium) would result in a $23,468 drop in sale price of the average house (from $391,597 to 368,129). For the actual average one-year premium increase of 13.04 percent ($339.30), the house price would have decreased by $3,143.09. This represents a cap rate of 10.80 percent.... The coefficient of the two-year premium change indicates that a 100 percent increase in the premium would result in a .0552 decrease in the log price. For the actual two-year increase in the premium of 20.61 percent ($536.27), the average house price declined $4,429.84. This represents a cap rate of 12.11 percent.

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by Charles Nyce 1, Randy E. Dumm 2, G. Stacy Sirmans 3 and Greg Smersh 4
The Journal of Risk and Insurance via Wiley Online Library http://onlinelibrary.wiley.comVolume 81, Issue 1; Article first published online: March 15, 2014
1. Assistant Professor of Risk Management and Insurance at the Florida State University cnyce@cob.fsu.edu.

2. the William T. Hold Professor of Risk Management and Insurance at the Florida State University.

3. the Kenneth G. Bacheller Professor of Real Estate at the Florida State University. 

4. Assistant Professor of Real Estate at the University of South Florida. . The authors wish to thank the Florida Catastrophic Storm Risk Management Center for financial support of this article.