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 premium 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 premium to cover loss experience is derived, and
tables of break-even policy premium are shown, based on estimated
models of Los Angeles housing prices 1971- 91.
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