Flood Insurance Market Penetration and Expectations of Disaster Assistance

Concern over resilience to natural disasters often focuses on moral hazard; expectations of disaster assistance may lead households in hazard-prone communities to forego insurance. This has been dubbed “charity hazard” in the literature on natural disasters. We examine flood insurance uptake using h...

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Bibliographic Details
Published in:Environmental & resource economics 2021-06, Vol.79 (2), p.357-386
Main Authors: Landry, Craig E., Turner, Dylan, Petrolia, Daniel
Format: Article
Language:English
Subjects:
Causality
Causation
Charity
Disaster relief
Disasters
Economic Policy
Economics
Economics and Finance
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Flood control
Flood insurance
Floods
Households
Insurance
Local history
Market penetration
Moral hazard
Natural disasters
Payments
Penetration
Political economy
Prone
Resilience
Uptake
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Summary:Concern over resilience to natural disasters often focuses on moral hazard; expectations of disaster assistance may lead households in hazard-prone communities to forego insurance. This has been dubbed “charity hazard” in the literature on natural disasters. We examine flood insurance uptake using household level survey data and employ instrumental variables (related to local history of aid distribution and political economy) to address endogeneity of individual expectations of eligibility for disaster assistance. To avoid potential problems with reverse causation, we drop any households that could have received payments in the past (triggering mandatory flood insurance purchase). We find coastal households that exhibit positive expectations of disaster aid eligibility are 25 to 42 percent less likely to hold flood insurance. We estimate that charity hazard could be responsible for 817,000 uninsured homes in the United States corresponding to a loss of $526 million in forgone annual revenue for the National Flood Insurance Program.
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-021-00565-x