European Central Bank working paper links monetary tightening to higher homeowners insurance prices and stronger housing market effects

The European Central Bank published research arguing that homeowners insurance can act as a monetary policy transmission channel, with contractionary shocks raising insurance prices and, in turn, amplifying effects on residential real estate and mortgage markets. Using granular data on the U.S. homeowners insurance market and insurers’ balance sheets, the paper finds that a 1 percentage point monetary policy surprise in the 10-year U.S. Treasury yield is associated with a 7 to 9.6 percentage point increase in insurance prices. The mechanism centres on interest rate hikes reducing the market value of insurers’ assets, tightening balance sheet and regulatory capital constraints and increasing the shadow cost of capital, with larger pass-through for insurers with low capital ratios and more interest-rate-sensitive portfolios (higher mark-to-market shares and longer fixed-income duration). The analysis also links this insurance supply response to wider outcomes: home prices fall more where local insurers are more sensitive to rates (around 0.7 percentage points more in high-sensitivity versus low-sensitivity states in the six months after a 1 percentage point cumulative surprise), with stronger effects in disaster-exposed areas, and mortgage applications (number and volume) decline more in areas served by rate-sensitive insurers. The paper is published in the ECB Working Paper Series and is presented as authors’ research rather than ECB views.