Informed decisions regarding flood events induces propensity for insurances

Abstract

Approaching climate changes are expected to cause an increase in the frequency of very severe events (see, e.g., Global Risk Report, 2017, Czajkowski et al., 2013, Botzen et al., 2009), such as hurricanes, droughts, and floods that affect the well-being of millions of people all over the world. Therefore, interest has grown in risk management associated with climatic events from the perspective of the financial services consumer and from the actors that provide protection – the insurance companies. We conduct a survey of over 1000 lower middle-class heads of household in a country with an emerging economy (Brazil), including people living in high risk areas, to verify the intuition that there is a causal link between the existence of information and the willingness of individuals to acquire flood insurance. The results of the experiment reveal that supplying information regarding the probability and severity of flood events increases the demand for protective services. Furthermore, living in a high-risk flood area encourages the acceptance of higher insurance premiums. We also document a set of attitudes of the surveyed subjects towards flood risk, according to the region in which they reside and the availability of information about flood risk.