According to an executive from Macro Securities, there is a great need for home-equity insurance in the United States, but the coverage is not yet available nationwide.

“Most people know that home prices have had unprecedented growth over the last seven years, and it just cant continue,” said Macro Securities Chief Operations Officer Sam Masucci, who is developing the home-price futures contracts with company co-founder and Yale University economics professor Robert Shiller.

Mr. Masucci observed that since the majority of people's net worth is tied to their houseand because of the fact that homeowners tap into home-equity lines of credit and use it for everything from college education to home improvementstheir finances would be significantly hurt by any decline in their home prices.

Mr. Shiller went so far as to suggest that home-equity insurance can even be likened to the advent of fire insurance 200 years ago, when it first emerged to address an unmet need of U.S. homeowners.

“Nowadays, everybody has a greater risk of their largest assettheir homegoing down in value than their home burning down. Still, everybody buys fire insurance, but there is no insurance available to protect against falling housing prices,” Mr. Masucci noted.

For example, if someone paid $250,000 for a house five years ago, Mr. Masucci explained, there is a good chance the house has doubled in value. However, the homeowner could be hurt if home prices begin to go down. So, he said, the homeowner could benefit by hedging that risk, and one way to do it would be for insurance companies to offer home-equity insurance, Mr. Masucci suggested.

“The futures market is very similar to the insurance market,” according to Mr. Masucci. “Once we launch our product, insurance companies could purchase futures contracts and start providing home-equity insurance to homeowners.”

So just like someone buying fire insurance, Mr. Masucci explained, a homeowner could buy a home-equity insurance plan. If home prices reflected in one of the housing indexes went down in value, then that person would be paid money. Meanwhile, insurance companies could get rid of their own risk of paying such claims by buying futures contracts for housing prices.

As for setting premium rates for home-equity insurance, Mr. Masucci pointed to a pilot program set up in Syracuse, N.Y., where one percent of a homes value was charged once as premium for a five-year contract that would have compensated owners for declines in the home's value.

Macro Securities has already been approached by a number of insurance companies for preliminary discussions, with those insurers potentially designing home-equity insurance products using Macro Securities' futures contracts as a hedge, according to Mr. Masucci, who declined to disclose which insurers his company has spoken with so far.

However, not everyone in the insurance industry is convinced that home-equity insurance could be the next hot product.

Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York, told National Underwriter that insurance companies are not likely to offer such coverage any time soon.

“First of all, the product is distinct from homeowners insurance. It's more of a derivative type of product, and insurers dont traditionally get involved in speculative risks,” according to Mr. Hartwig.

Beyond that, he added, if such a product were to be offered by insurers, it would take a long time to gain all the requisite regulatory approval.

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.