Group 08

The Effect of Insurance Premiums on Climate Risk Perceptions

Author
Affiliation

Byeong-Hak Choe

SUNY Geneseo

Published

November 25, 2025

Dear Group 8,

Thank you for your rich and ambitious Research Kick-off Report on insurance premiums and climate risk perception. You’ve identified an important channel through which households experience climate risk in financial terms, and you’ve connected this well to discounting, salience, and market structure. The project has high potential, especially if you sharpen the causal narrative and keep the scope manageable.

Clarifying the Scope: Final Proposal

You are working toward the presentation and the final proposal. Your main task is to:

  • Build a clear environmental economics narrative around insurance, climate risk, and household behavior.
  • Use existing literature, descriptive facts, and published figures to motivate your research question and policy discussion.
  • Propose conceptual frameworks and possible policy options, not full econometric results.

Next Steps for Your Final Proposal

Over the next few weeks, I recommend focusing on:

  1. Clarify your core research question and mechanism

    • For example:

      “How do increases in climate-related insurance premiums affect households’ perceived climate risk and attitudes toward adaptation and climate policy?”

    • Be explicit about the direction of causality you want to emphasize:

      • Climate risk → higher expected losses → higher premiums → changes in perception/behavior.
      • Or, insurance market structure and policy → distorted pricing → misaligned perceptions and adaptation.
  2. Develop a simple conceptual framework (no heavy math required)
    • Sketch a household decision problem:
      • Trade-offs between current housing consumption, moving/adaptation costs, and perceived future climate damages.
      • Where do insurance premiums enter the budget constraint and perceived risk?
    • Use concepts like risk pricing, externalities, moral hazard, adverse selection, and intertemporal choice to structure the story.
  3. Frame insurance as both a price signal and a constraint
    • Distinguish between:
      • Insurance as a signal of risk that might update beliefs.
      • Insurance as a financial burden that can trap or “lock in” households in risky areas or push them out.
    • Ask: under what conditions do households respond to the signal versus ignore or resist it?
  4. Highlight key policy trade-offs
    • Should policymakers:
      • Allow full risk-based pricing, even if it raises affordability concerns?
      • Subsidize premiums for equity reasons?
      • Invest in adaptation to reduce risk (and thus premiums)?
      • Or discourage rebuilding in high-risk areas altogether?
    • Frame these through efficiency vs. equity, and short-run vs. long-run climate resilience.
  5. Use existing empirical evidence for motivation (optional but helpful)
    • Instead of running your own regressions, you can:
      • Show one or two published figures or tables that illustrate patterns in climate risk, premiums, or mortgage outcomes.
      • Summarize qualitative findings (e.g., how households report interpreting premium changes, willingness to pay for risk reduction, etc.).
    • Treat these as motivation and illustrations, not as your own empirical contribution.

Suggested References

You do not need to cite everything, but drawing on a few of these will strengthen the motivation, context, and policy discussion in your proposal.

In your presentation slides and the final proposal, consider adding one or two visual elements drawn from these sources, such as:

  • A chart showing trends in premiums in high-risk vs. low-risk regions.
  • A map or figure showing geographic variation in climate risk and insurance costs.
  • A visualization or table summarizing willingness-to-pay for risk mitigation from the Ecological Economics paper.

These visuals should be clearly labeled and cited, and used to motivate your research question.

Questions to Think About as You Refine Your Final Proposal

You do not need to answer all of these, but they may help you sharpen your narrative and policy recommendations.

a. Insurance Premiums and Climate Risk Perception – Consumer & Citizen Angle

  • When your insurance premium rises due to wildfire or flood risk, do you interpret it as “the market knows something I need to know”? Why or why not?
  • From a citizen perspective, should policymakers allow insurance prices to fully reflect climate risks, or should they cap or subsidize premiums to protect affordability?
    • How might each choice affect individual risk perception, location choices, and political support for climate policy?

b. Housing Choice, Lock-In, and System Constraints

  • Rising premiums may signal growing climate risk, but many households can’t move because of mortgages, jobs, or family ties.
    • Is climate risk perception meaningful if individuals have no viable alternatives?
  • How do lock-in effects (being “stuck” in place) change the welfare analysis of risk-based pricing?
  • If several neighbors relocate or invest in adaptation after premium hikes, how might that shape your own perception of risk? Are social spillovers sometimes stronger than price signals?

c. Behavioral Economics & Misperception of Climate Risk

  • Why might some households ignore or downplay rising premiums? Consider:
    • Present bias (focusing on current costs and ignoring long-run risk),
    • Availability heuristic (“nothing bad has happened recently”),
    • Limited attention (complex contracts, automatic renewals).
  • How could insurers or governments communicate climate risk in ways that counter these biases without causing panic or resignation?

d. Systemic Risks and Insurance Market Failure

  • What happens when insurers underprice climate risk (e.g., due to regulation or political pressure)?
    • How does that affect rebuilding in high-risk areas and the timing of adaptation?
  • What happens when insurers overprice risk or withdraw coverage entirely?
    • Think about affordability crises, local economic decline, and climate-driven migration.
  • In cases of severe market failure, who should step in when private insurance markets collapse—state governments, the federal government, or some form of public insurer of last resort?
    • How might each option affect risk perception, incentives to adapt, and equity?

Best,
Byeong-Hak

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