Home Equity Insurance
Home equity insurance policies, policies insuring homeowners against declines in the price of their homes, would bear some resemblance both to ordinary insurance and to ﬁnancial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in eﬀect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular ﬁxed insurance premia and is entitled to a claim if both there is a suﬀicient decline in the real estate price index and a speciﬁed life event (such as a move beyond a certain geographical distance) occurs. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices 1971-91.
Shiller, Robert J. and Weiss, Allan N., "Home Equity Insurance" (1994). Cowles Foundation Discussion Papers. 1317.