Factors affecting flood insurance purchase in residential properties in Johor, Malaysia

U G Aliagha,W W Choong,T E Jin,H M Ali,M Nadzri Jaafar

doi:10.5194/nhess-14-3297-2014

Abstract

Abstract. High-impact floods have become a virtually annual experience in Malaysia, yet flood insurance has remained a grossly neglected part of comprehensive integrated flood risk management. Using discriminant analysis, this study seeks to identify the demand-side variables that best predict flood insurance purchase and risk aversion between two groups of residential homeowners in three districts of Johor State, Malaysia: those who purchased flood insurance and those who did not. Our results revealed an overall 34% purchase rate, with Kota Tinggi district having the highest (44%) and thus the highest degree of flood risk aversion. The Wilks' lambda F test for equality of group means, standardised discriminant function coefficients, structure correlation, and canonical correlation has clearly shown that there are strong significant attribute differences between the two groups of homeowners, based on the measures of objective flood risk exposure, subjective risk perception, and socio-economic cum demographic variables. However, the measures of subjective risk perception were found to be more predictive of flood insurance purchase and flood risk aversion.

Highlights

Flooding disasters are Malaysia’s worst nightmare in terms of the overall area and population affected, frequency, financial loss, and psychological trauma
The measures are: (1) number of high-impact floods experienced; (2) expectation of an increase in future flood frequency; (3) likelihood of dropping flood insurance if a flood is not experienced for 2 years; (4) perception that flood insurance premiums are high but willingness to pay slightly more than the fair price; (5) perception of unreliability of insurance firms to pay insurance claims and their reluctance to provide flood insurance coverage; and (6) perception that the flood protection system is not adequate
Item (4) (“perception that flood insurance premiums are high but willingness to pay slightly more than the fair price”) proves that the subjective risk judgements and values of modest-risk individuals go beyond the linear standard rationality that prefers an actuarially fair premium to show a more realistic world situation by accepting a premium slightly more expensive than the fair price

Summary

Introduction

Flooding disasters are Malaysia’s worst nightmare in terms of the overall area and population affected, frequency, financial loss, and psychological trauma. It is estimated that the average annual flood damage in Malaysia is about RM 3 billion (USD 912.8 million) (Deloitte, 2003), which can negatively affect the nation’s GDP. Records show that the trend has been increasing. This is glaringly obvious when one compares the two worst flood events in the country: the 1971 flood cost RM 200 million (USD 60.8 million) and resulted in the death of 61 persons; the successive 50 and 100 yr floods hit Johor State in December 2006 and January 2007 and together cost RM 1.5 billion (USD 456.4 million) and led to the deaths of 18 persons (MNREM, 2007; Badrul et al, 2010; Hamzah et al, 2012)

Methods

Results

Conclusion