It is the subject of a paper by Catherine Wagner (2022). Paper won 2025 US Economic Journal: Economic Policy Best Papers Award (Despite being published 3 years ago). In his paper, Dr. Wagner uses data from 20 American Atlantic and Gulf Coast States between 2001 and 2017. Housing Valuation Data comes from Zilo Transaction and Evaluation Database (ZTRAX)
These are 83% of the flood insurance policies written in the US in the states. Most flood insurance policies in the US are known by the public body as the National Flood Insurance Program (NFIP); NFIP also forms flood insurance rate map (firm), which displays geographical floodgains in each region, and also depicts special dangerous areas and risk premium areas.
The author’s economical strategy depends on the inter-concluded strategy run by the reforms of the Congress in 2012 and 2014. Specific reforms are Biggart-Water and HFIAA reforms.
- BiggerT-Waters Flood Insurance Reform Act 2012: In 2013, there has been a 25 percent increase of 25 percent per year, starting in 2013 for primary houses to be sold, which pays subsidized rates due to grandfather-grandfather, or classified as “severe repetition loss” properties.
- 2014 homeowner Flood Insurance Strength Act (HFIAA): All subsidized nondapped residences (ie, of which were initially unaffected by Biggart-Watters) expands increase in rates. The premium will increase every year until they actually reach the appropriate level, although the HFIAA limits this annual rate increase, except for a “severe repetitive loss” between 5 percent and 18 percent for all residential properties.
These reforms are used to estimate home owners to estimate the desire to pay and reduce costs as Biggart-Watters and HFIAA reforms affected the price of flood insurance, for some homes, but not based on other people whether the House was a non-primary residence.
Using this approach, authors feel that:
In high-risk flood areas in the eastern United States, the average price of flood insurance is only about their required payments of the owners of the house, but more than 40 percent of the house owners are unlicensed … only high-risk home owners are ready to pay equal amounts to their expected payment only for flood insurance contracts.
In most insurance markets, individuals are at risk and they are ready to pay More Actually by reasonable price; However, in flood insurance, it seems that individuals risk loving. Can market failure tell what is happening? Wagner claims that standard insurance market failures such as adverse selections, moral threats, public bailies, and credit barriers do not seem to be a major issue for the flood insurance market. However, some adverse selection is:
Natural disaster insurance markets are selected adversely because the will of the owners of the household positively be correlated with observatory (ie, height of the house)
The insurer does not pay the price efficiently.
One reason may be that the person underestimates the exemption of their actual flood risk or tail incidence. This is strange because Kahnman and Towerski Prospect Theory suggests that individuals wrongly guess the possibility of rare incidents, but they usually Above-Remove the possibility of a rare incidents.
Nevertheless, the study is interesting the whole time. You can read the entire paper here.
