Abstract
Home equity insurance policies—policies insuring homeowners against declines in the prices of their homes—would bear some resemblance both to ordinary insurance and to financial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in effect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate indices. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular fixed insurance premia and is entitled to a claim if both a sufficient decline in the real estate price index and a specified life event (such as a move beyond a certain geographical distance) occur. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices from 1971 to 1994.
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Shiller, R.J., Weiss, A.N. Home Equity Insurance. The Journal of Real Estate Finance and Economics 19, 21–47 (1999). https://doi.org/10.1023/A:1007779229387
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DOI: https://doi.org/10.1023/A:1007779229387