Flood Underinsurance

Abstract

Using data on expected flood damage and National Flood Insurance Program policies, we estimate annual flood risk protection gaps and underinsurance among single-family residences in the contiguous United States. Annually, 70 percent ($17.1 billion) of total flood losses would be uninsured. Underinsurance, defined as protection gaps among properties with positive flood risk and incentives to purchase full flood insurance coverage, totals $15.7 billion annually. Eighty percent of at-risk households are underinsured, and average underinsurance is $7,208 per year. Underinsurance persists both inside and outside the Federal Emergency Management Agency’s special flood hazard areas, suggesting frictions in the provision of risk information and regulatory compliance. Seventy percent of uninsured households would benefit from purchasing flood insurance, even as prevailing prices rise. Household beliefs about climate risks are strongly correlated with underinsurance.

Keywords: climate risk, physical risk, flood, underinsurance

JEL Classification: G22, G52, Q54