Analysis
Hyeyoon Jung and Jaehoon (Kyle) Jung estimate that deductibles and coverage limits leave households bearing 29% of expected property losses. Their October 5 article reports a model result, not a tally of unpaid claims. [1]
The costs that remain after buying cover
The researchers find more residual exposure among policyholders with lower credit scores and properties facing greater severe-disaster risk. They caution that the credit-score patterns are correlations: they do not prove that financial constraints alone cause the differences. The findings describe the sample and model, not an identical shortfall for every homeowner. [1]
The new work follows an April study of millions of insurance contracts from 2021, matched with mortgage and property-risk information. That earlier analysis distinguished three parts of a policy: the premium buys the cover, the deductible leaves an initial amount with the household, and the coverage limit caps the insurer’s payment. All three matter to what protection a household actually receives. [2]
In the earlier dataset, the median deductible was about 0.3% of rebuilding value, while median expected annual losses were about 0.09%. Thus a deductible that looks small beside a property’s value can still absorb a substantial share of common losses. The researchers found that coverage limits rarely bound in their loss estimates; deductibles were the more important margin. [2]
Why insurers leave some risk with the homeowner
The October analysis examines the trade-off between sharing risk and maintaining incentives to protect a property. Insurers cannot observe every maintenance or prevention decision. Leaving some cost with the policyholder can encourage care, even while reducing the protection purchased. The estimated direct cost of those unobservable actions was comparatively modest. [1]
Expected loss is an average across possible outcomes. A household can have a low annual average exposure and still face a damaging, infrequent bill. Consequently, the premium alone cannot describe either the protection provided or the financial burden left after a disaster.
What remains uncertain
These are the researchers’ findings, not institutional policy or a forecast of this year’s claims.