Individual Decisions in the Face of Natural Hazards: An Analysis of Flood Insurance Purchases, Claims Filed and Reform Options for the National Flood Insurance Program

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

In this project, the Principal Investigators will undertake a broad program of research designed to improve understanding of individual decision making regarding insurance purchases and adoption of flood mitigating activities. This research will benefit from a unique access to the entire nationwide portfolio of the US National Flood Insurance Program (NFIP) between 2000 and 2009. The research will address three areas: (1) flood insurance decision making by individuals; (2) the adoption of flood mitigation actions, and (3) policy reform options for the NFIP. In the first part of the reseach, statistical and econometric analyses will be conducted to understand how flood insurance purchases vary around the county; to identify the types of insurance contracts individuals purchase and how purchases vary spatially, temporally, and by characteristics of the policyholders; and to tease apart how insurance choices are influenced by socio-economic factors, learning in the form of previous experience or proximity to a flood, the availability bias in terms of the extent of news coverage of flood events, and the presence of post disaster federal relief. Next, econometric approaches will be used to address a series of questions related to flood mitigation. To what extent do household mitigation activities reduce flood claims and what are the other drivers of claim amounts at an individual level? How do community-level mitigation activities influence flood claims, and what are the other key drivers of community-level claim amounts? And what factors explain why some communities adopt flood risk reduction measures and others do not? Community level questions will be answered using information on the NFIP?s Community Rating System, in which communities that adopt mitigation measures receive a discount in insurance premiums. Finally,, the research will examine possible options for reforming the NFIP. Congress and FEMA are currently debating reform options for the NFIP, especially given its $19 billion debt since Hurricane Katrina. The research team will examine and compare, in light of the expected results described above, several risk management reform options to sustain higher take-up rates and increased adoption of cost-effective mitigation and also to make the program better able to handle truly catastrophic loss years (e.g. issuance of catastrophe bonds, multi-year flood insurance). Those options will be examined in terms of their net cost to the program, their equitable distribution of risk and cost, and their political acceptability. In terms of broader impacts, millions of Americans are exposed to flood risk but there are serious issues about how to assure they are adequately covered and remain so over time. The proposed research effort, its high level of collaborative efforts with academia, practitioners and policymakers, and its broader impacts through complementary dissemination activities (in the classroom at The University of Pennsylvania, mentoring activities, conferences, policy briefs, and academic papers) will not only advance our academic knowledge about how individuals behave vis-à-vis flood risk, but ultimately assure many more people are well prepared for future floods. Our findings will also have much broader applicability to other catastrophe risks.