Household insurance and financial stress: do households maintain coverage on their most important assets?
Melbourne Institute Working Paper No. 24/23
Date: November 2023
Author(s):
Abstract
Rising home insurance costs are exposing new affordability risks that threaten the capacity of households to secure their most important asset. Breaking with conventional framing of a linear relationship between income and insurance, we explore the causal relationship between financial stress and insurance coverage and the role of tight cashflow positions therein. Using Australian panel data, we find that financial stress and tight balance sheet positions are associated with reduced expenditure on home and vehicle insurance with significance across the income distribution. Our results hold with detailed controls in place for the value of assets, suggesting that households reduce coverage in the wake of a shock to shore up household finances. By demonstrating a link between financial stress and underinsurance, our results contribute new evidence on the income dynamics of underinsurance. We show that affordability issues arise amongst households at all income levels, pointing to an important new set of risks that are driven by financial stress.