The Distributional Impact of FEMA's Community Rating System
47 Pages Posted: 4 Aug 2022
Date Written: July 14, 2022
Abstract
CRS incentivizes investments in risk reduction above NFIP standards using insurance premium discounts. These discounts are subsidized by increasing premiums in non-CRS communities. We examine the distributional impact of this cross-subsidization process. We find that redistribution does occur, but the gains and losses are not economically large with 95% of households gaining or losing no more than 0.3% of their income. We also find that the strongest predictor of gains is flood risk. Thus, CRS appears to reduce the cost of living in the riskier communities, a result that has clear policy implications if it induces sorting into riskier locations.
Keywords: Flood risk, flood insurance, distributional effects, community rating system
JEL Classification: G22, Q52, Q58, R14
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