Flood Insurance Market Penetration and Expectations of Disaster Assistance

46 Pages Posted: 13 May 2019 Last revised: 22 May 2020

See all articles by Craig E. Landry

Craig E. Landry

UGA Ag & Applied Economics

Dylan Turner

University of Georgia - Department of Agricultural & Applied Economics

Daniel R. Petrolia

Mississippi State University - Department of Agricultural Economics

Date Written: April 14, 2019

Abstract

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 market penetration using household level survey data. We address endogeneity of survey responses regarding confidence in government disaster aid payments for property damage using instruments that explain the local history of aid distribution, but drop any households that would have received payments in the past. We find that households that exhibit confidence in disaster assistance payments are 25 to 42 percent less likely to hold flood insurance. We estimate that charity hazard is responsible for at least 817,000 uninsured homes in the United States corresponding to a loss of $526 million in forgone yearly revenue for the National Flood Insurance Program. We offer some policy recommendations.

Keywords: charity hazard, flood insurance, natural hazards

JEL Classification: Q54, G22

Suggested Citation

Landry, Craig and Turner, Dylan and Petrolia, Daniel R., Flood Insurance Market Penetration and Expectations of Disaster Assistance (April 14, 2019). Available at SSRN: https://ssrn.com/abstract=3371980 or http://dx.doi.org/10.2139/ssrn.3371980

Craig Landry (Contact Author)

UGA Ag & Applied Economics ( email )

Athens, GA 30602-7509
United States

Dylan Turner

University of Georgia - Department of Agricultural & Applied Economics ( email )

Athens, GA 30602-7509
United States

Daniel R. Petrolia

Mississippi State University - Department of Agricultural Economics ( email )

Box 5187
Mississippi State, MS 39762
United States

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