We find that over the studied period, in FEMA-mapped 100-year floodplains (SFHAs), the average claim rate – defined as the ratio of paid claims to the number of policies-in-force – is 1.55 percent. Surprisingly, outside the 100-year floodplains, the average claim rate is also higher than 1 percent at 1.27 percent, with no statistically significant difference in the rates across the two groups. This higher-than-expected claim rate in non-SFHAs could reflect inaccurate and out-of-date flood maps. It could also be due to adverse selection: only the riskiest properties in FEMA-defined non-SFHAs are insuring in these areas. Our results show that the majority of claims are for modest amounts. Half of claims over the three decades of data we analyzed are for less than 10 percent of the building’s value. Only a small portion of claims exceed three-quarters of a building’s value.
Our findings suggest that buyers of floodplain properties have a limited awareness about flood hazards, despite the federal requirement for flood insurance for floodplain properties with a federally-backed mortgage. Our results suggest that it is the result of being flooded, rather than knowing there is a potential to be flooded, that affects property prices (“seeing is believing”).
Federal disaster relief potentially creates moral hazard: receiving or expecting to receive money from the government after a disaster might reduce demand for insurance, resulting in even greater need for government relief when another disaster hits. Overall, we find that federal disaster assistance grants result in decreased demand for insurance. Low‐interest SBA disaster loans have no systematic impact on insurance purchase decisions.
Six months after Hurricane Sandy, we surveyed over 1,000 homeowners in New York City who live in a flood-prone area about their flood risk perceptions and flood insurance purchases. 44% of respondents stated they purchased flood insurance because it was mandatory. Only 21% bought flood insurance voluntarily, 33% did not have coverage, and 2% did not know whether they had flood coverage. People tend to overestimate their flood probability and underestimate their potential flood damage.
The U.S. Terrorism Risk Insurance Act (TRIA) was established in 2002 as a temporary measure to make terrorism insurance widely available to corporations. TRIA will expire at the end of 2014 unless extended by the federal government. If extended, the government might require insurers to assume more risk which could increase prices. We find that under current market conditions, firms’ demand for terrorism insurance is strong and is not very sensitive to gradual price changes.
A midsize community of 50,000 people that experiences a moderate hail storm could expect to reduce losses by approximately $4 to $8 million by adopting and enforcing appropriate building codes.
The President signed the Biggert-Waters Flood Insurance Reform Act with overwhelming bipartisan support from Congress. This bill included provisions for risk-based pricing for flood insurance to improve the NFIP’s financial basis. Some legislators are now wavering on their commitment to risk-based pricing because of concerns their constituents will not be able to afford flood insurance. We propose a means-tested voucher program coupled with a loan program for investments in loss reduction measures, made affordable by reductions in the NFIP risk-based premiums.
The NFIP’s Community Rating System (CRS) is a voluntary incentive program that encourages community floodplain management activities that exceed the minimum NFIP requirements. Today, only 28 of the 1,466 NFIP communities in New York State participate in the CRS. This 1.9% participation rate is three times lower than the national average.
The Rockaway Peninsula (RP) is an 11-mile community in New York City with a population of 103,825 that was severely impacted by Hurricane Sandy. Data analysis shows that only 14.4 percent of the housing units in the RP had flood insurance in 2012.
We propose three guiding principles to make insurance more transparent and equitable, and to encourage investment in protective measures: Principle 1: Premiums reflecting risk; Principle 2: Dealing with equity and affordability issues; Principle 3: Multi-year insurance. The National Flood Insurance Program (NFIP) is a natural starting point for multi-year insurance tied to the property, not the homeowner.
The more effective an investment is in preventing harm, the more difficult it is for decision makers to remember the need for the investments. It is the experience of real — not imagined — losses that seemed essential for convincing decision makers of the value of protective investments…
Following the devastating storm surge and flooding from Hurricane Sandy, concerns have been raised about the status of flood insurance in the United States. Our analysis shows that many homeowners who sustained flood damage from Sandy did not have a flood insurance policy…
Rationales for voting include self-interest, duty to nation or group, and duty to humanity. People may believe that voting in self-interest is a rational way to pursue their interests, however this is not rational, because the probability of a single vote having an effect is extremely low. Americans who believe it is their duty to vote on the basis of self-interest tend to oppose taxes, but favor spending that they see as benefiting themselves personally
A U.S. law, “Implementing Recommendations of the 9/11 Commission Act of 2007,” requires that all cargo bound for the U.S. must be scanned by non-intrusive technology to detect radiological contraband before the cargo is loaded onto a ship at an international port. The operational feasibility of 100-percent scanning has been questioned by many government officials and private sector professionals involved with managing supply chains. Our study compares the operational feasibility of two types of inspection protocols designed to detect the presence of nuclear devices…
Our analysis of the entire NFIP portfolio between 1978 and 2008 reveals that in some states, policyholders have paid as much as 15 times in premiums as they have collected in claims; in other states, policyholders have received 5 times more in insurance claims than they paid in premiums over this period…
Why do few people in catastrophe-prone areas invest in risk reduction measures?
Long‐term sustainable solutions can overcome myopic thinking and provide economic incentives for encouraging sound investments in risk reduction measures…