Policy Tenure Under the U.S. National Flood Insurance Program (NFIP)

Abstract

In the United States, insurance against flood hazard (inland flooding or storm surge from hurricanes) has been provided mainly through the National Flood Insurance Program (NFIP) since 1968. The NFIP covers $1.23 trillion of assets today. This article provides the first analysis of flood insurance tenure ever undertaken: that is, the number of years that people keep their flood insurance policy before letting it lapse. Our analysis of the entire portfolio of the NFIP over the period 2001-2009 reveals that the median tenure of new policies during that time is between two and four years; it is also relatively stable over time and levels of flood hazard. Prior flood experience can affect tenure: people who have experienced small flood claims tend to hold onto their insurance longer; people who have experienced large flood claims tend to let their insurance lapse sooner. To overcome the policy and governance challenges posed by homeowners' inadequate insurance coverage, we discuss policy recommendations that include for banks and government-sponsored enterprises (GSEs) strengthening their requirements and the introduction of multiyear flood insurance contracts attached to the property, both of which are likely to provide more coverage stability and encourage investments in risk-reduction measures.