Stocks, Flows, and Flood Insurance: A Nationwide Analysis of the Capitalized Impact of Annual Premium Discounts on Housing Values

Abstract

The National Flood Insurance Program (NFIP) is chronically insolvent due to the increased intensity and frequency of natural disasters. NFIP was not designed to be actuarially sound; however, the increasing debt associated with NFIP has resulted in policy efforts to increase flood insurance premiums. Despite widespread concerns over the affordability of higher premiums, less attention has been paid to the impact of premium rate increases on housing values and associated homeowner wealth. We use the quasi-experimental nature of eligibility criteria for the largest class of flood insurance premium discounts to causally estimate the capitalization of flood insurance premium subsidies using nationwide and city-specific hedonic difference-in-difference regressions. We find that in a nationally pooled sample, the average capitalization of subsidy eligibility is $11,807 and show that capitalization exhibits significant and intuitive heterogeneity across municipalities. Our results inform ongoing policy discussions surrounding the planned transition to NFIP’s Risk Rating 2.0 premium schedule.

Keywords: NFIP, Flood, Capitalization, Quasi-Experiment

JEL Classification: H50, Q54, R21