What’s at Stake? Understanding the Role of Home Equity in Flood Insurance Demand

Changing flood insurance demand shifts climate risk across homeowners, lenders, and governments. We show that flood insurance take-up follows rising and falling home equity over the housing boom and bust across markets with different price dynamics. To isolate the causal effect of risk shifting on insurance demand, we study flood insurance policy renewals over the housing bust, exploiting granular differences in purchase timing that led policyholders to experience differential changes in skin-in-the-game exposure to flood risk for the same change in home equity. When homeowners have less equity exposure to flood losses, they are less likely to renew their policies. Lenders, in turn, have little incentive to require flood insurance when they can sell their mortgages to federally backed mortgage purchasers. This paper was accepted by Tomasz Piskorski, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.01302 .