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Adaptation and Adverse Selection in Markets for Natural Disaster Insurance

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  • Katherine R. H. Wagner

Abstract

This paper quantifies frictions in uptake, tests for adverse selection, and analyzes welfare effects of proposed reforms in natural disaster insurance markets. I find that willingness to pay is remarkably low. In high-risk flood zones, fewer than 60 percent of homeowners purchase flood insurance even though premiums are only two-thirds of own costs. Estimating flood insurance demand and cost elasticities using house-level variation in premiums from recent US congressional reforms reveals that these homeowners select into insurance based on observable differences in adaptation but not private information about risk. These findings change the sign of predicted welfare effects of proposed policies.

Suggested Citation

  • Katherine R. H. Wagner, 2022. "Adaptation and Adverse Selection in Markets for Natural Disaster Insurance," American Economic Journal: Economic Policy, American Economic Association, vol. 14(3), pages 380-421, August.
    • Handle: RePEc:aea:aejpol:v:14:y:2022:i:3:p:380-421
    DOI: 10.1257/pol.20200378
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    References listed on IDEAS

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    4. Justin Gallagher & Daniel Hartley, 2017. "Household Finance after a Natural Disaster: The Case of Hurricane Katrina," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 199-228, August.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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