Flood Insurance Market Penetration and Expectations of Disaster Assistance

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