Does your insurance protect you from climate risk?
Research from Wharton’s Parinitha Sastry reveals how climate risk is being mispriced in mortgages and property insurance, leaving homeowners to pay the price.
2 min. read
In a new study, Wharton finance professor Parinitha Sastry and co-authors examine how mispricing of climate risk in mortgages and property insurance creates large taxpayer exposures, and leads to excess credit flows to risky areas. The working paper, “When Insurers Exit: Climate Losses, Fragile Insurers, and Mortgage Markets” won the 2025 Marshall Blume Prize in Financial Research.
The paper highlights the growing importance of how climate risk, insurance, and mortgage markets intersect. “After many major natural disasters, households discover that their insurance may not be as reliable as they thought,” Sastry explains. “Rebuilding can be extremely challenging when an insurer goes insolvent, as losses spill over to the mortgage market. Furthermore, insurer insolvency can destroy trust in the insurance industry altogether. All of these patterns are likely only to become more important as rising losses from climate events puts more pressure on insurer balance sheets.”
In the paper, findings suggest that climate risk is being mispriced in both property insurance and mortgages. “What this means in practice is that the rate you get on your mortgage, or the premium you pay in your insurance, may not reflect your actual risk,” Sastry says. “This is important because one important role of financial markets is that they provide signals about underlying risk. With mispricing, the signal gets jammed, meaning that households and lenders become more exposed to climate risk than they may realize.”
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