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Voluntary purchases and adverse selection in the market for flood insurance

Author

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  • Bradt, Jacob T.
  • Kousky, Carolyn
  • Wing, Oliver E.J.

Abstract

Flood-related events are the most damaging natural hazard in the United States, yet many households at risk do not have flood insurance. Using detailed policy- and claims-level data from the National Flood Insurance Program (NFIP), we conduct a holistic analysis of the market for publicly provided flood insurance in the U.S., focusing on not only high-risk areas subject to an incomplete mandate requiring the purchase of insurance, but also lower risk areas where no such mandate exists. We are able to better understand determinants of demand for insurance in a setting with voluntary purchase and low take-up and therefore provide a more complete analysis of the market for flood insurance in the U.S. than previous work. In addition to exploring correlates of demand for flood insurance, this paper provides quasi-experimental estimates of households’ willingness-to-pay for flood insurance and finds strong evidence to suggest the NFIP failing to utilize full information on flood risk leads to adverse selection in the program.

Suggested Citation

  • Bradt, Jacob T. & Kousky, Carolyn & Wing, Oliver E.J., 2021. "Voluntary purchases and adverse selection in the market for flood insurance," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:jeeman:v:110:y:2021:i:c:s0095069621000826
    DOI: 10.1016/j.jeem.2021.102515
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    References listed on IDEAS

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    Cited by:

    1. Kendra Marcoux & Katherine R. H. Wagner, 2023. "Fifty Years of U.S. Natural Disaster Insurance Policy," CESifo Working Paper Series 10431, CESifo.
    2. Shi, Beibei & Jiang, Lisha & Bao, Rui & Zhang, Ziqing & Kang, YuanQi, 2023. "The impact of insurance on pollution emissions: Evidence from China's environmental pollution liability insurance," Economic Modelling, Elsevier, vol. 121(C).
    3. Joakim A. Weill, 2023. "Flood Risk Mapping and the Distributional Impacts of Climate Information," Finance and Economics Discussion Series 2023-066, Board of Governors of the Federal Reserve System (U.S.).
    4. Xu, Yilan & Huang, Yi, 2022. "Does climate change news inform flood insurance take?," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322178, Agricultural and Applied Economics Association.
    5. Osberghaus, Daniel & Botzen, Wouter & Kesternich, Martin & Iurkova, Ekaterina, 2022. "The Intention-Behavior Gap in Climate Change Adaptation," VfS Annual Conference 2022 (Basel): Big Data in Economics 264073, Verein für Socialpolitik / German Economic Association.
    6. Carolyn Kousky & Noelwah R. Netusil, 2023. "Flood insurance literacy and flood risk knowledge: Evidence from Portland, Oregon," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(2), pages 175-201, July.
    7. Justin Contat & Caroline Hopkins & Luis Mejia & Matthew Suandi, 2023. "When Climate Meets Real Estate: A Survey of the Literature," FHFA Staff Working Papers 23-05, Federal Housing Finance Agency.
    8. Joakim Weill, 2023. "Flood Risk Mapping and the Distributional Impacts of Climate Information," Working Papers 2023.10, FAERE - French Association of Environmental and Resource Economists.
    9. Xu, Yilan & Box-Couillard, Sebastien, 2022. "Social learning about climate change risk," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322309, Agricultural and Applied Economics Association.

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    More about this item

    Keywords

    Natural disasters; Flood risk; Insurance; Adverse selection;
    All these keywords.

    JEL classification:

    • G52 - Financial Economics - - Household Finance - - - Insurance
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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