Credit Crunch and Insurance Consumption: The Aftermath of the Subprime Mortgage Crisis

Abstract

Using cross-state panel auto insurance premium data from 2007 to 2012 in the U.S., this study provides evidence that individual purchases of private auto insurance were excessively reduced during and after the U.S. subprime mortgage. Analyses show that the credit crunch triggered by a shock in house prices was a major contributing factor of the reduced consumption of auto insurance during and after the crisis. This result is robust even after controlling for associated factors such as insurance prices, personal spending on vehicles and general consumption, recession indicators and the use of alternative transportation. Tests also find that a drop in house prices was also related to the deterioration of underwriting performance. These findings provide evidence for a real effect of the banking crisis.