Purchase Flood Insurance Research Articles

The attitude towards flood insurance purchase when respondents' preferences are uncertain: a fuzzy approach

Individuals may have difficulty in determining whether or not to buy insurance against low‐probability, high‐loss events. This ambivalence would cause preference uncertainty and decrease homeowners' interest in voluntarily buying insurance. This paper incorporated fuzzy set theory into contingent valuation analysis to examine the determinants of attitude towards buying flood insurance under preference uncertainty. The results show that the perceived levels of flood risk, experience with flood, disposable income, as well as house conditions, are influential factors in the decision‐making process for insurance purchase. However, both the estimated price and income elasticities are low for flood insurance purchase. It is worthy to note that governments' artificial structures provide a disincentive for buying insurance, although respondents perceived or/and are exposed to a high level of flood risk. The findings also show that the spread of fuzzy willingness to pay regions is wide, resulting from respondents' high uncertainty on their value judgment to insurance. This indicates that preference uncertainty and conservatism rule are the key factors that cause respondents to tend to reject buying insurance.

National Flood Insurance: Crisis and Renewal

While the magnitude of 2005's hurricane-related flood losses may have been improbable, the eventual bankruptcy of the NFIP was not. The program was never designed to charge full risk-based rates or to build the reserves necessary to meet its financial commitments. By failing to charge prices that reflect the value of the flood insurance in-force, the NFIP has been accumulating unfunded liabilities that eventually would have to be financed by taxpayers, and eventuality that has arrived. If the NFIP is to remain in operation without exposing taxpayers to undue burdens, then dramatic programmatic reforms are necessary. In the process of designing a sustainable NFIP, Congress should also look at other problems with the program, including its potential to induce commercial and residential development in areas prone to flooding, its low participation rates, and its often contradictory interaction with other federal disaster assistance programs. Specifically, Congress should phase out explicit subsidies, expand mandatory flood-insurance purchase requirements, grant FEMA more flexibility to increase NFIP rates, and investigate ways to increase property owners' compliance with mandatory purchase requirements.

Flood Insurance Coverage in the Coastal Zone

We explore behavior and test theory regarding the determinants of flood insurance coverage in the coastal zone using household-level data for nine southeastern counties. We use Tobit regression models to assess the importance and magnitude of insurance cost, risk factors, community characteristics, and household attributes on flood insurance purchase for residential building structures. Overall estimates indicate price inelastic demand, though subsidized policyholders are more sensitive to price and hold greater flood insurance coverage (controlling for value of asset at risk). We find support for rational choice in the coastal zone, with flood insurance coverage positively correlated in the level of flood risk. We find evidence that coastal erosion risk effects flood insurance demand, and that community level erosion hazard mitigation projects influence flood insurance holdings, with shoreline armoring appearing to act as a substitute and beach replenishment appearing to act as a complement.

Group Flood Insurance Program and Flood Insurance Purchase Decisions

This article describes a research project focusing on flood insurance purchase decisions of low-income residents of eastern North Carolina who are obliged to purchase an NFIP flood insurance policy as a result of having accepted a disaster assistance grant following Hurricane Floyd. A survey was sent to a random sample of these disaster assistance recipients and results show that, despite the obligation, as many as 41% do not purchase flood insurance. People say that they do not purchase flood insurance because they cannot afford it. The only significant predictor of flood insurance purchase for this population is the purchase of homeowner insurance.

Adoption of Insurance Coverage and Modes of Information Transfer: Case Study of Eastern North Carolina Floodplain Residents

In September 1999, the passage of Hurricane Floyd created a catastrophic flood in eastern North Carolina. Residents of floodplains across the region were forced to evacuate their homes on short notice. Upon their return a week later, many residents found extensive damage to their homes, and total losses amounted to billions of dollars. A normal assumption would be that many of the individual losses within the 100-year flood zone would be covered under the National Flood Insurance Program (NFIP). The Floyd flood, however, was so catastrophic that areas outside the 100-year flood zone often found themselves under several feet of water. There has been limited examination of the effects of flooding on areas outside the NFIP zone. This study was designed to determine how much insurance coverage existed both inside and outside the 100-year zone, and why residents did or did not purchase flood insurance. Pertinent information was obtained by means of a questionnaire delivered to floodplain residents a year after the flood. The results show that whereas a large number of flood-zone residents did not have insurance coverage, almost none of the residents outside the zone were covered. It was also found that respondents received little information concerning flooding potential of their property from realtors, mortgage officers, or insurance agents. These three groups of agents play an important role in house purchasing, and should provide new homeowners with important information concerning house location in the floodplain, flood vulnerability, and insurance availability.

Should flood insurance be mandatory? Insights in the wake of the 1997 New Year’s Day flood in Reno–Sparks, Nevada

The USA faces major challenges from flooding, with more than 12% of its population (over 30 million people) living in areas of periodic inundation. The National Flood Insurance Program (NFIP) has offered flood insurance to renters, homeowners and businesses since the late 1960s, yet only about a quarter of those eligible have purchased policies that would reduce the risks caused by flooding. This research investigated why single-family homeowners do or do not choose to purchase flood insurance. The study was conducted within the context of the 1997 New Year’s Day flood in Reno, Nevada, an area with a long history of flooding. The paper discusses the evolution of the NFIP, focusing on the Reform Act of 1994 whereby the federal government attempted to mandate coverage and transfer decision-making responsibility from individuals to institutional lenders with links to the federal government. The most statistically significant variables in an individual’s decision to purchase flood insurance were found to include: (1) lender compliance; (2) perceptions of personal vulnerability to flooding relative to other hazards; (3) a concern that flooding will be a constant threat; and (4) concern that government assistance will not be adequate or forthcoming during a major flood disaster. While the Reform Act will no doubt increase flood insurance coverage, it has limitations; for example, not all dwellings fall under the purview of the new regulations (especially those outside of Special Flood Hazard Areas). Further, the paper questions whether the new regulations will, in fact, reduce risk, since the shift away from individual responsibility may cause some individuals to develop a ‘false sense of security’ and choose to forego any mitigation or preparation activity. Importantly, because the decision to purchase flood insurance as a form of hazard mitigation is still a voluntary choice for many individuals, it warrants continued study.

A flood of concern

It's that time of year again. Hurricane season in the United States recently began and continues through November, according to the U.S. Federal Emergency Management Agency (FEMA).The U.S. National Weather Service is forecasting an above‐average hurricane season with 7 or more hurricanes, and FEMA is urging people to protect themselves financially from floodwaters and storm surges by purchasing flood insurance policies.

The Demand for Flood Insurance: Empirical Evidence

Flood damages that occur worldwide remain largely uninsured losses despite the efforts of governmental programs that in many cases make insurance available at below fair market cost. The current study focuses on the financial experience of the United States' National Flood Insurance Program (NFIP) from 1983 through 1993 to examine the hypothetical determinants of the flood insurance purchasing decision. The empirical analysis supports the hypotheses that income and price are influential factors in one's decision to purchase flood insurance. Our empirical findings also suggest that disaster relief efforts crowd out the purchase of flood insurance. Expenditures on mitigation, federally sponsored loss reduction efforts, are found to be negatively associated with the purchase of flood insurance. Flood insurance purchases at the state level are found to be highly correlated with the level of flood losses in the state during the prior year.

Flood risks and the willingness to purchase flood insurance

Computer simulation experiments were conducted to determine the effects of alternative sources of uncertainty on the willingness to pay for flood insurance. Two alternative insurance protection schemes were investigated: coinsurance and fixed coverage. The question investigated here is to what extent does the insurance scheme influence how purchasers respond to flood risks? Floods were assumed to be log normally distributed and the effects on the purchase of insurance of uncertainties in the parameters of the distribution were explored using response surface analysis. Results indicate that fixed coverage insurance provisions shift most of the uncertainty in the physical parameters governing natural disaster occurrences away from the insuree and onto the insurer. The results also show that the form of the damage function has little effect on the demand for flood insurance.

Risk Preferences and Flood Insurance

AbstractA detailed theoretical model characterizing the individual's decision to purchase flood insurance is specified and the magnitude of the risk parameter is estimated using data based on transactions of flood insurance purchases. Empirical results for several samples of this subset of the general population indicated that consumers exhibited a relatively uniform degree of risk aversion across various localities where different hydrologic and economic conditions prevailed. While the estimates presented should not be directly extrapolated to the entire population located in a flood prone area, they provide evidence that parameters determining an individual's and/or community's willingness to pay for flood protection can be measured.

Flood Insurance: Some Determinants of Adoption

The literature on response to natural hazards is surveyed to identify factors possibly at work in determining what coping behaviors are adopted. These factors are then explored in the context of a specific study of the purchase or nonpurchase of flood insurance in the floodplain communities of Seguin and New Braunfels, Texas. Three factors are found to be significantly related to insurance adoption: previous experience of flood damage, social class, and a single dimension of personality-internal-external locus of control.