Insured, but Still on the Hook: Who Bears the Most Risk in Homeowner’s Insurance?

An October 5, 2026 post from the Federal Reserve Bank of New York's Liberty Street Economics builds on earlier research using millions of homeowners' insurance contracts matched with property-level exposure and disaster risk. The analysis shows that even insured households remain "on the hook" because deductibles and coverage limits leave them responsible for part of a loss. Insurers use these contract terms to address moral hazard: since they cannot perfectly observe how well homeowners maintain or protect their properties, requiring policyholders to bear part of a loss preserves incentives to reduce damage risk.

The researchers estimate that deductibles and coverage limits leave households exposed to 29 percent of expected losses, even though the direct estimated cost of moral hazard is small. Households appear willing to pay substantially to transfer property risk to insurers, and this willingness to pay increases with risk aversion and underlying property risk. The economic consequences of moral hazard therefore show up not only in direct costs to insurers, but also in the amount of risk that remains with homeowners.

The residual exposure is not evenly distributed. Lower-FICO policyholders are estimated to be more risk averse, pay higher risk premia, face higher costs associated with moral hazard, and retain more uninsured exposure. All four measures decline steadily as FICO scores rise. Paradoxically, the households that may have the greatest difficulty absorbing a disaster-related loss are also those whose insurance contracts leave them most exposed to one. Residual exposure is also higher for properties facing greater tail disaster risk, with substantial geographic variation across locations.

The authors caution that these patterns are correlations, not causal estimates, and could reflect other factors correlated with FICO scores rather than financial constraint alone. The findings leave open how much of the concentration of residual risk stems from insurer pricing, household choice, or underlying property risk, and what policy responses might address the burden on financially constrained homeowners.