Come Rain or Shine: Evidence On Flood Insurance Purchases in Florida

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Come Rain or Shine: Evidence On Flood Insurance Purchases in Florida

INTRODUCTION

The economic costs of natural disasters have risen dramatically over the past several decades. In the 1950s, natural disasters caused $53.6 billion in damages worldwide and by the 1990s, damages had risen to $778.3 billion. In 2008 alone, natural catastrophes inflicted $200 billion in direct economic damages worldwide, the third most costly year ever. This growth in damages from natural disasters has made the question of how to manage catastrophe risk more salient, attracting the attention of policymakers and scholars alike. Improving management will require developing adequate and sustainable financial protection for potential victims of future disasters. Insurance has typically played a key role in providing financial protection against catastrophes. And insured losses have been growing along with total damages: of the 25 most costly insured losses over the period 1970-2008, 14 occurred since 2001, 12 of which were in the United States (Kunreuther and Michel-Kerjan, 2009).

Among natural hazards, floods are of particular concern since during the 20th century in the United States, they accounted for the most lives lost and the most property damage of all natural disasters (Perry, 2000). In the United States, standard multiperil homeowners insurance policies, which are normally required as a condition for a mortgage, cover damage from fire, wind, hail, Ughtning, and winter storms, among other perils. Coverage for flood damage resulting from rising water is explicitly excluded in homeowners insurance policies, but coverage for these losses has been available through the federally managed National Flood Insurance Program (NFIP) since 1968.

Federal law requires property owners in 100-year floodplains - referred to as Special Flood Hazard Areas (SFHAs) - with a mortgage from a federally backed or regulated lender to purchase flood insurance, yet the effectiveness of this requirement in practice has been questioned as take-up rates have been found to be quite low in many flood hazard areas across the country (e.g., Tobin and Calfee, 2005).1 Lack of nationwide data on the number of properties in floodplains hinders a complete assessment of NFIP market penetration. Two recent studies attempt to fill the gap. The first finds that in a sample of coastal areas, half of eligible properties participated in the NFIP (Kriesel and Landry, 2004). The second, a 2006 RAND report, estimates that about 49 percent of properties in SFHAs purchased NFIP flood insurance, and only 1 percent of properties outside SFHAs purchased insurance, even though one-third of NFIP policies are outside SFHAs (Dixon et al., 2006). The RAND estimates represent a national average that masks high regional variation; take-up rates are much lower in some parts of the country such as the Midwest.

Despite these concerns about take-up rates, very little research has empirically examined...

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