Household insurance and financial stress: do households maintain coverage on their most important assets?

Rising home insurance costs are exposing new affordability risks that threaten households’ ability to protect their most important asset. While this problem is often assumed to be concentrated among low-income households, there has been limited examination of how affordability pressures are distributed across the income spectrum. Breaking with conventional framing of a monotonic relationship between income and insurance, we focus instead of financial stress and insurance coverage in order to examine the role of budgetary constraints in driving underinsurance without limiting our analysis to low-income households. Using Australian panel data in a difference-in-differences model, we find that financial stress is associated with reduced expenditure on home and vehicle insurance and that this result is not isolated to low-income households. In fact, we find a stronger association between financial stress and insurance reduction amongst households with income above the median. We also find a strong association for households with tight cashflow positions, regardless of income. These results suggest that households reduce coverage in the wake of a shock to shore up household finances. These results hold with detailed controls in place for the value of assets. 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, which in turn raise questions about the effectiveness with which insurance systems can be relied upon to address the needs of households, and about how policy should be designed to identify and address emerging protection gaps.