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Could Flood Insurance be Privatised in the United States? A Primer

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  • Erwann Michel-Kerjan

    (Center for Risk Management and Decision Processes, Wharton School, University of Pennsylvania, Huntsman Hall, Suite 500, 3730 Walnut Street, Philadelphia, PA 19104, U.S.A.)

  • Jeffrey Czajkowski

    (Center for Risk Management and Decision Processes, Wharton School, University of Pennsylvania, Huntsman Hall, Suite 500, 3730 Walnut Street, Philadelphia, PA 19104, U.S.A.)

  • Howard Kunreuther

    (Center for Risk Management and Decision Processes, Wharton School, University of Pennsylvania, Huntsman Hall, Suite 500, 3730 Walnut Street, Philadelphia, PA 19104, U.S.A.)

Abstract

Since 1968, homeowners’ flood insurance in the United States has been mainly provided through the federally-run National Flood Insurance Program (NFIP). The Flood Insurance Reform Act of 2012 raises the possibility of moving coverage to the private sector, assuming the market can price this risk effectively and that premiums reflect risk. This paper provides the first large-scale quantification of risk-based premiums for over 300,000 residences prone to either storm surge or inland flooding using commercially developed probabilistic catastrophe models, and compares these premiums with those currently charged by the NFIP. Our findings reveal significant differences between the two. In some areas, the NFIP charges prices that are more than 15 times the pure premium, while other areas are charged up to three times less than the pure premium. The paper discusses the market and policy implications of these findings.

Suggested Citation

  • Erwann Michel-Kerjan & Jeffrey Czajkowski & Howard Kunreuther, 2015. "Could Flood Insurance be Privatised in the United States? A Primer," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 40(2), pages 179-208, April.
    • Handle: RePEc:pal:gpprii:v:40:y:2015:i:2:p:179-208
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    Citations

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    Cited by:

    1. Céline Grislain-Letrémy & Bertrand Villeneuve, 2019. "Natural disasters, land-use, and insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(1), pages 54-86, March.
    2. Hudson, Paul & Botzen, W.J. Wouter & Feyen, Luc & Aerts, Jeroen C.J.H., 2016. "Incentivising flood risk adaptation through risk based insurance premiums: Trade-offs between affordability and risk reduction," Ecological Economics, Elsevier, vol. 125(C), pages 1-13.
    3. Marilyn Montgomery & Howard Kunreuther, 2018. "Pricing Storm Surge Risks in Florida: Implications for Determining Flood Insurance Premiums and Evaluating Mitigation Measures," Risk Analysis, John Wiley & Sons, vol. 38(11), pages 2275-2299, November.
    4. Conte, Marc N. & Kelly, David L., 2018. "An imperfect storm: Fat-tailed tropical cyclone damages, insurance, and climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 677-706.

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