Rent Guarantee Insurance

Abramson and Van Nieuwerburgh study Rent Guarantee Insurance (RGI), a product in which an insurer pays the landlord on behalf of a tenant who defaults on rent due to a negative income or health expenditure shock, in exchange for a monthly premium proportional to rent. The central question is whether RGI can be designed to be both welfare-improving and financially viable, given the frictions of moral hazard and adverse selection.

The authors develop a dynamic overlapping-generations equilibrium model of the rental market that features endogenous rent default, security deposits, evictions, and homelessness. Households face idiosyncratic persistent and transitory income risk, idiosyncratic medical expenditure risk, and aggregate (cyclical) income risk. Rental contracts are non-contingent, households face borrowing constraints, and housing is indivisible with a minimum quality floor. Landlords set deposits to break even in expectation given observed tenant characteristics. An insurance agency can offer RGI and must also break even in the long run. The model is calibrated to the United States at monthly frequency. Income dynamics are estimated from CPS data (1994–2023) and incorporate transitions among employment, unemployment, out-of-labor-force, and retirement states along with transfer income (unemployment insurance, disability, food stamps) and a progressive tax system. Key moments targeted by Simulated Method of Moments include a delinquency rate of 12.15% (model: 12.69%), average security deposit of $984 (model: $992, from approximately 500,000 Craigslist listings across the 100 largest MSAs), homelessness rate of 1.43% (model: 1.42%), and home-ownership rate of 63.6% (model: 63.2%).

The model’s pre-RGI analysis establishes that persistent income shocks — not transitory shocks or medical shocks — are the primary driver of rent defaults. Default risk remains elevated for 3–6 months following a persistent shock, implying that short-duration RGI coverage is insufficient to prevent eviction; coverage must span multiple months.

The paper’s main policy experiments introduce RGI under different access rules and provider types. Unrestricted RGI (available to all renters) generates large welfare gains through improved risk-sharing and lower security deposits — because insured tenants pose less default risk, landlords lower deposit requirements — but is not financially viable for either a public or private insurer due to moral hazard and adverse selection. Even a public insurer that internalizes the fiscal savings from reduced homelessness cannot break even under unrestricted access.

Restricting access changes the viability calculus sharply. A publicly provided RGI targeted to households at the bottom of the wealth distribution can achieve financial viability: these households are precisely those most prone to homelessness, so the reduction in homelessness expenses — which the public insurer internalizes — offsets the insurance deficit. This restricted public RGI generates substantial welfare gains for the most vulnerable households.

A privately provided RGI must instead target higher-wealth renters to break even, because these households have low default risk (limiting claim payouts) while remaining sufficiently risk averse to pay the premium. The intersection of financial viability and take-up is small, yielding a limited target audience. The private program has minimal impact on housing insecurity, and the most vulnerable households derive little benefit. This pattern matches observed private RGI markets, where providers restrict access to renters in good financial condition.

An RGI mandate — requiring all renters to purchase coverage — mitigates adverse selection by improving the pool of insured tenants, dramatically increasing financial viability and allowing the insurer to reduce the premium substantially while still breaking even. Mandated RGI is highly effective at preventing housing insecurity and generates welfare gains concentrated among the most financially vulnerable households.

Scope conditions: results are calibrated to U.S. income, medical, and housing market parameters as of 2019. The insurer’s borrowing cost matters: the public insurer faces lower, counter-cyclical municipal bond spreads, whereas private insurers face higher, pro-cyclical corporate spreads, which constrains the generosity of private contracts in recessions.

Q: What is Rent Guarantee Insurance and how does it work mechanically in the model? A: RGI is a contract under which a tenant pays a flat monthly premium equal to a fraction kappa of rent. When the insured tenant defaults, the insurer pays the landlord directly and deducts one period from the tenant’s stock of “insurance credit.” The tenant remains housed. Once insurance credit is exhausted, the insurer no longer covers defaults. The insurer sets the premium and the maximum coverage duration to break even in the long run.

Q: Why do most rent defaults arise from persistent rather than transitory shocks? A: The model shows that the renter population is disproportionately exposed to persistent unemployment and labor-force-exit spells, and that negative persistent income shocks are harder to smooth through savings than transitory ones. Default risk remains elevated for 3–6 months after a persistent shock but dissipates quickly after a transitory shock. This implies that RGI coverage periods of only a few months would fail to prevent eviction for the majority of defaulting tenants.

Q: How does RGI affect security deposits in equilibrium? A: Because landlords observe the tenant’s insurance status at lease signing and deposits are set to make landlords break even in expectation, insured tenants pose lower default risk and thus face lower upfront deposit requirements. This deposit reduction is a key welfare channel of RGI, as large deposits tie up a disproportionate share of poor households’ wealth and price the most vulnerable out of housing entirely.

Q: Why is unrestricted RGI financially non-viable even for the public insurer? A: Unrestricted access induces both adverse selection — riskier households self-select into coverage — and moral hazard — insured households alter their default and savings behavior. These effects cause the insurer to run a persistent deficit. Even a public insurer that internalizes the fiscal cost savings from reduced homelessness cannot recoup enough to break even, implying that an unrestricted program would require an ongoing subsidy.

Q: How does publicly provided restricted RGI achieve financial viability? A: By targeting households at the bottom of the wealth distribution — precisely those most prone to homelessness — the public RGI program produces large reductions in homelessness. Because the public insurer internalizes the fiscal expenses associated with shelters, health services, and policing that accompany homelessness, these savings are passed through to the insurer and are sufficient to offset the insurance deficit. No such mechanism is available to a private insurer.

Q: Why must private RGI target higher-wealth renters, and what are the consequences? A: Private insurers must break even using only premium revenue, without access to homelessness cost savings. Higher-wealth renters have lower default probabilities, which limits claim payouts, while remaining sufficiently risk averse to demand coverage and pay the premium. The viable target audience is small given these competing requirements. As a result, private RGI covers few households, has minimal effect on housing insecurity, and provides essentially no benefit to the most vulnerable renters. This pattern is consistent with observed private RGI markets.

Q: What are the two differences between public and private insurers in the model? A: First, the public insurer internalizes the fiscal costs of homelessness (shelters, health services, policing), raising its net benefit from offering coverage. Second, the public insurer borrows at municipal bond spreads — which are lower than corporate spreads and counter-cyclical — whereas the private insurer faces higher, pro-cyclical corporate spreads. Counter-cyclical borrowing costs allow the public insurer to extend more generous coverage precisely when aggregate conditions deteriorate and claims rise.

Q: How does an RGI mandate improve financial viability? A: Mandatory enrollment forces all renters, including low-risk ones, into the insurance pool, which counteracts adverse selection. The expanded and higher-quality pool dramatically reduces per-insured expected claim costs, allowing the insurer to lower the premium substantially while still breaking even. The low-premium mandated policy is then both affordable and effective at preventing housing insecurity, with welfare gains concentrated among the most financially vulnerable renters.

Q: What novel data does the paper use for calibration of security deposits? A: The authors construct a dataset of approximately 500,000 Craigslist rental listings scraped across the 100 largest U.S. metropolitan statistical areas between November 2022 and March 2024 to measure the cross-sectional distribution of security deposits. The average deposit in this dataset is $984, which the model matches closely at $992. The data also reveal that the deposit-to-rent ratio is decreasing in house quality, reflecting the higher default risk of low-income renters in lower-quality units.

Q: What is the paper’s definition of homelessness and what rate does the model match? A: Homelessness is defined broadly to include sheltered homeless, unsheltered homeless (0.6% of households), and doubled-up families (0.83% of households), for a total of 1.43% of U.S. households. The model matches this rate closely at 1.42%.

Q: What is the paper’s key implication for the design of housing policy? A: The central implication is that financial viability and impact on housing insecurity are in tension for private insurers, and cannot both be achieved simultaneously. Only a publicly provided program that internalizes homelessness fiscal costs and faces counter-cyclical borrowing spreads can target the most vulnerable renters, break even, and materially reduce housing insecurity. Private RGI, while viable for a narrow segment, cannot substitute for public provision as a tool against homelessness.

Q: How does RGI relate conceptually to rental assistance programs? A: The paper distinguishes RGI from rental assistance on a structural basis: insurance contracts require tenants to pay premiums, making them potentially self-financing for private providers, whereas rental assistance is a net transfer that can never be self-financing. This conceptual distinction motivates studying whether RGI can be designed to eliminate the need for ongoing fiscal transfers, though the analysis ultimately shows that a public subsidy or mandate is required to serve the most vulnerable renters.

Rent Guarantee Insurance (RGI): A contract under which an insured tenant pays a monthly premium equal to a flat percentage of rent; when the tenant defaults, the insurer pays the landlord directly, preserving tenancy, for a limited number of periods governed by the tenant’s stock of insurance credit.

Insurance Credit: An endowment of periods of RGI coverage that households receive upon entry into the model; each time the insurer pays on behalf of a defaulting tenant, one unit of credit is consumed, and no further coverage is available once credit is exhausted.

Housing Insecurity: In the paper’s framework, the set of outcomes — rent delinquency, eviction, and homelessness — arising from the combination of non-contingent rental contracts, borrowing constraints, and idiosyncratic or aggregate income and medical shocks.

Security Deposit: An upfront payment from tenant to landlord, set by the competitive landlord to break even in expectation given the tenant’s characteristics and insurance status; a key channel through which RGI affects welfare by reducing the upfront cost barrier to obtaining housing.

Moral Hazard (in RGI context): The change in a tenant’s default, savings, and housing choices induced by the presence of insurance coverage, which increases expected claim costs for the insurer relative to a world where behavior is held fixed.

Adverse Selection (in RGI context): The tendency of renters with higher default risk to self-select into RGI when access is unrestricted, worsening the insurer’s risk pool and driving up expected payouts relative to premiums.

Homelessness Externality: The fiscal costs borne by government — for shelters, health services, and policing — that accompany homelessness; the public insurer internalizes these costs, creating a net benefit from RGI that private insurers cannot capture.

Counter-cyclical Borrowing Spread: The feature of public (municipal bond) financing whereby borrowing costs fall during recessions, allowing the public insurer to expand coverage when claims are highest; contrasted with private insurers’ pro-cyclical corporate bond spreads that tighten precisely when aggregate conditions worsen.