Benefits of and strategies to update premium rates in the US National Flood Insurance Program under climate change

The United States’ National Flood Insurance Program (NFIP) has accumulated over $20 billion in debt to the US Treasury since 2005, partly due to discounted premiums on homes in flood-prone areas. To address this issue, FEMA introduced Risk Rating 2.0 in October 2021, which is able to assess and charge more accurate and equitable rates to homeowners. However, rates must be continually updated to account for increasing flood damage caused by sea level rise and more intense hurricanes due to climate change. This study proposes a strategy to adopt updated premium rates that account for climate change effects and address affordability and risk mitigation issues with a means-tested voucher program. The strategy is tested in a coastal community, Ortley Beach, NJ, by projecting its future flood risk under sea level rise and storm intensification. Compared with using static rates for all the properties in Ortley Beach, the proposed strategy is shown to reduce the NFIP's potential losses to the community from 2020 to 2050 by half (from $4.6 million to $2.3 million), improve the community's flood resistance, and address affordability concerns. Sensitivity analysis of varying incomes, loan interest rates, and conditions for a voucher indicates that the strategy is feasible and effective under a wide range of scenarios. Thus, the proposed strategy can be applied to various communities along the US coastline as an effective way of updating risk-based premiums while addressing affordability and resilience concerns.     

Policy tenure under the U.S. National Flood Insurance Program (NFIP)

In the United States, insurance against flood hazard (inland flooding or storm surge from hurricanes) has been provided mainly through the National Flood Insurance Program (NFIP) since 1968. The NFIP covers $1.23 trillion of assets today. This article provides the first analysis of flood insurance tenure ever undertaken: that is, the number of years that people keep their flood insurance policy before letting it lapse. Our analysis of the entire portfolio of the NFIP over the period 2001-2009 reveals that the median tenure of new policies during that time is between two and four years; it is also relatively stable over time and levels of flood hazard. Prior flood experience can affect tenure: people who have experienced small flood claims tend to hold onto their insurance longer; people who have experienced large flood claims tend to let their insurance lapse sooner. To overcome the policy and governance challenges posed by homeowners' inadequate insurance coverage, we discuss policy recommendations that include for banks and government-sponsored enterprises (GSEs) strengthening their requirements and the introduction of multiyear flood insurance contracts attached to the property, both of which are likely to provide more coverage stability and encourage investments in risk-reduction measures.     

The Affordability of Flood Risk Property-Level Adaptation Measures

The affordability of property-level adaptation measures against flooding is crucial due to the movement toward integrated flood risk management, which requires the individuals threatened by flooding to actively manage flooding. It is surprising to find that affordability is not often discussed, given the important roles that affordability and social justice play regarding flood risk management. This article provides a starting point for investigating the potential rate of unaffordability of flood risk property-level adaptation measures across Europe using two definitions of affordability, which are combined with two different affordability thresholds from within flood risk research. It uses concepts of investment and payment affordability, with affordability thresholds based on residual income and expenditure definitions of unaffordability. These concepts, in turn, are linked with social justice through fairness concerns, in that, all should have equal capability to act, of which affordability is one avenue. In doing so, it was found that, for a large proportion of Europe, property owners generally cannot afford to make one-time payment of the cost of protective measures. These can be made affordable with installment payment mechanisms or similar mechanisms that spread costs over time. Therefore, the movement toward greater obligations for flood-prone residents to actively adapt to flooding should be accompanied by socially accessible financing mechanisms.     

Adoption of Individual Flood Damage Mitigation Measures in New York City: An Extension of Protection Motivation Theory

This study offers insights into factors of influence on the implementation of flood damage mitigation measures by more than 1,000 homeowners who live in flood‐prone areas in New York City. Our theoretical basis for explaining flood preparedness decisions is protection motivation theory, which we extend using a variety of other variables that can have an important influence on individual decision making under risk, such as risk attitudes, time preferences, social norms, trust, and local flood risk management policies. Our results in relation to our main hypothesis are as follows. Individuals who live in high flood risk zones take more flood‐proofing measures in their home than individuals in low‐risk zones, which suggests the former group has a high threat appraisal. With regard to coping appraisal variables, we find that a high response efficacy and a high self‐efficacy play an important role in taking flood damage mitigation measures, while perceived response cost does not. In addition, a variety of behavioral characteristics influence individual decisions to flood‐proof homes, such as risk attitudes, time preferences, and private values of being well prepared for flooding. Investments in elevating one's home are mainly influenced by building code regulations and are negatively related with expectations of receiving federal disaster relief. We discuss a variety of policy recommendations to improve individual flood preparedness decisions, including incentives for risk reduction through flood insurance, and communication campaigns focused on coping appraisals and informing people about flood risk they face over long time horizons.     

Insights into Flood Risk Misperceptions of Homeowners in the Dutch River Delta

Flooding is one of the most significant natural disasters worldwide. Nevertheless, voluntary take-up of individual damage reduction measures is low. A potential explanation is that flood risk perceptions of individual homeowners are below objective estimates of flood risk, which may imply that they underestimate the flood risk and the damage that can be avoided by damage reduction measures. The aim of this article is to assess possible flood risk misperceptions of floodplain residents in the Netherlands, and to offer insights into factors that are related with under- or overestimation of perceived flood risk. We analyzed survey data of 1,848 homeowners in the Dutch river delta and examine how perceptions of flood probability and damage relate to objective risk assessments, such as safety standards of dikes, as well as heuristics, including the availability heuristic and the affect heuristic. Results show that many Dutch floodplain inhabitants significantly overestimate the probability, but underestimate the maximum expected water level of a flood. We further observe that many respondents apply the availability heuristic.     

The Emergence of Flood Insurance in Canada: Navigating Institutional Uncertainty

Flood insurance has remained unavailable in Canada based on an assessment that it lacks economic viability. In response to Canada's costliest flood event to date in 2013, the Canadian insurance industry has started to develop a framework to expand existing property insurance to cover flood damage. Research on flood insurance has overlooked why and how insurance systems transition to expand insurance coverage without evidence of economic viability. This article will address this gap through a case study on the emergence of flood insurance in Canada, and the approach to its expansion. Between 2013 and 2016, insurance industry officials representing over 60% of premiums collected in Canada were interviewed. These interviews revealed that flood insurance is being expanded in response to institutional pressure, specifically external stakeholder expectations that the insurance industry will adopt a stronger role in managing flood risk through coverage of flood damage. Further evidence of this finding is explored by assessing the emergence of a unique flood insurance model that involves a risk‐adjusted and optional product along with an expansion of government policy supporting flood risk mitigation. This approach attempts to balance industry concerns about economic viability with institutional pressure to reduce flood risk through insurance. This analysis builds on existing research by providing the first scholarly analysis of flood insurance in Canada, important “empirical” teeth to existing conceptual analysis on the availability of flood insurance, and the influence of institutional factors on risk analysis within the insurance sector.     

Insurance,Public Assistance,and Household Flood Risk Reduction: A Comparative Study of Austria,England, and Romania

In light of increasing losses from floods, many researchers and policymakers are looking for ways to encourage flood risk reduction among communities, business, and households. In this study, we investigate risk‐reduction behavior at the household level in three European Union Member States with fundamentally different insurance and compensation schemes. We try to understand if and how insurance and public assistance influence private risk‐reduction behavior. Data were collected using a telephone survey (n = 1,849) of household decisionmakers in flood‐prone areas. We show that insurance overall is positively associated with private risk‐reduction behavior. Warranties, premium discounts, and information provision with respect to risk reduction may be an explanation for this positive relationship in the case of structural measures. Public incentives for risk‐reduction measures by means of financial and in‐kind support, and particularly through the provision of information, are also associated with enhancing risk reduction. In this study, public compensation is not negatively associated with private risk‐reduction behavior. This does not disprove such a relationship, but the negative effect may be mitigated by factors related to respondents' capacity to implement measures or social norms that were not included in the analysis. The data suggest that large‐scale flood protection infrastructure creates a sense of security that is associated with a lower level of preparedness. Across the board there is ample room to improve both public and private policies to provide effective incentives for household‐level risk reduction.     

Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location‐Specific Premiums in the Netherlands

As flood risks grow worldwide, a well‐designed insurance program engaging various stakeholders becomes a vital instrument in flood risk management. The main challenge concerns the applicability of standard approaches for calculating insurance premiums of rare catastrophic losses. This article focuses on the design of a flood‐loss‐sharing program involving private insurance based on location‐specific exposures. The analysis is guided by a developed integrated catastrophe risk management (ICRM) model consisting of a GIS‐based flood model and a stochastic optimization procedure with respect to location‐specific risk exposures. To achieve the stability and robustness of the program towards floods with various recurrences, the ICRM uses stochastic optimization procedure, which relies on quantile‐related risk functions of a systemic insolvency involving overpayments and underpayments of the stakeholders. Two alternative ways of calculating insurance premiums are compared: the robust derived with the ICRM and the traditional average annual loss approach. The applicability of the proposed model is illustrated in a case study of a Rotterdam area outside the main flood protection system in the Netherlands. Our numerical experiments demonstrate essential advantages of the robust premiums, namely, that they: (1) guarantee the program's solvency under all relevant flood scenarios rather than one average event; (2) establish a tradeoff between the security of the program and the welfare of locations; and (3) decrease the need for other risk transfer and risk reduction measures.     

Insurability and Mitigation of Flood Losses in Private Households in Germany

In Germany, flood insurance is provided by private insurers as a supplement to building or contents insurance. This article presents the results of a survey of insurance companies with regard to eligibility conditions for flood insurance changes after August 2002, when a severe flood caused 1.8 billion euro of insured losses in the Elbe and the Danube catchment areas, and the general role of insurance in flood risk management in Germany. Besides insurance coverage, governmental funding and public donations played an important role in loss compensation after the August 2002 flood. Therefore, this article also analyzes flood loss compensation, risk awareness, and mitigation in insured and uninsured private households. Insured households received loss compensation earlier. They also showed slightly better risk awareness and mitigation strategies. Appropriate incentives should be combined with flood insurance in order to strengthen future private flood loss mitigation. However, there is some evidence that the surveyed insurance companies do little to encourage precautionary measures. To overcome this problem, flood hazards and mitigation strategies should be better communicated to both insurance companies and property owners.     

保险业在金融系统性风险传染路径中起到“媒介”作用吗？——基于金融市场尾部风险传染路径的实证分析

2008年金融危机之后,保险业固有的不会产生系统性风险的传统认知被打破。关于保险业在金融系统性风险传染路径中的角色定位,本文从其业务特点和风险传染特点出发,首次提出"媒介"作用的猜想并进行实证研究。本文沿用当前主流研究方法,利用尾部风险的传染网络来研究其媒介作用的大小。本文选取了包括6家上市保险机构在内的34家金融机构,研究区间跨度为2011到2018年。根据金融市场数据"厚尾"和"非对称性"特征,文章首先采用AR-（GJR）GARCH-Skew-t模型对股票收益序列进行处理,然后根据Copula函数,计算尾部相依度,再通过最小生成树和阈值方法构建金融市场的风险传染网络。本文还通过构建保险业媒介中心度来探究其媒介作用的程度。实证结果表明：（1）在金融市场风险传染网络中,保险业起到连接银行市场和证券市场的重要媒介作用;（2）保险机构中又以多元化经营的中国平安的风险传染作用最强,其次是中国人寿。（3）银行市场中的兴业银行和保险市场的联系最紧密,证券信托市场则是中信证券、广发证券等。研究明确了风险传染的路径和关键性节点,为制定更具针对性的系统性风险监管措施提供了参考。     

Household‐Level Coastal Adaptation and Its Drivers: A Systematic Case Study Review

Evidence‐based information on household‐level adaptation is an important element of integrated management of vulnerable coastal regions. A growing number of empirical studies deal with household‐level adaptation at the coast in different regions. This article provides a systematic review of these studies. We analyze studies according to how households in different parts of the world are currently adapting, or how they are intending to adapt, and identify explanatory factors for adaptation behavior and intention. We find that households implement a broad range of adaptation measures and that adaptation behavior is explained by individual factors such as socioeconomic and cognitive variables, experience, and perceived responsibilities. Nonpersonal characteristics have also been used to explain adaptation behavior and intention but have not been extensively investigated. Few studies employ qualitative research methods and use inductive approaches as well as models stemming from behavioral economics. Our findings suggest that coastal risk management policies should communicate the efficacy of household‐level adaptation, in addition to information about flood risk, in order to encourage coastal households in their adaptation activities. In this context, we discuss the role of resources and responsibility of households for their adaptation behavior. We describe the lessons learnt and formulate a research agenda on household‐level adaptation to coastal flood risk. In practice, coastal risk management policies should further promote individually driven adaptation by integrating it in adaptation strategies and processes.     

Promoting Seismic Retrofit Implementation Through “Nudge”: Using Warranty as a Driver

This article proposes a new type of warranty policy that applies the “nudge” concept developed by Thaler and Sunstein to encourage homeowners in Japan to implement seismic retrofitting. Homeowner adaptation to natural disasters through loss reduction measures is known to be inadequate. To encourage proactive risk management, the “nudge” approach capitalizes on how choice architecture can influence human decision‐making tendencies. For example, people tend to place more value on a warranty for consumer goods than on actuarial value. This article proposes a “warranty for seismic retrofitting” as a “nudge” policy that gives homeowners the incentive to adopt loss reduction measures. Under such a contract, the government guarantees all repair costs in the event of earthquake damage to the house if the homeowner implements seismic retrofitting. To estimate the degree to which a warranty will increase the perceived value of seismic retrofitting, we use field survey data from 1,200 homeowners. Our results show that a warranty increases the perceived value of seismic retrofitting by an average of 33%, and an approximate cost‐benefit analysis indicates that such a warranty can be more economically efficient than an ex ante subsidy. Furthermore, we address the failure of the standard expected utility model to explain homeowners’ decisions based on warranty evaluation, and explore the significant influence of ambiguity aversion on the efficacy of seismic retrofitting and nonanalytical factors such as feelings or trust.     

A Probabilistic Framework for Risk Analysis of Widespread Flood Events: A Proof‐of‐Concept Study

This article presents a flood risk analysis model that considers the spatially heterogeneous nature of flood events. The basic concept of this approach is to generate a large sample of flood events that can be regarded as temporal extrapolation of flood events. These are combined with cumulative flood impact indicators, such as building damages, to finally derive time series of damages for risk estimation. Therefore, a multivariate modeling procedure that is able to take into account the spatial characteristics of flooding, the regionalization method top‐kriging, and three different impact indicators are combined in a model chain. Eventually, the expected annual flood impact (e.g., expected annual damages) and the flood impact associated with a low probability of occurrence are determined for a study area. The risk model has the potential to augment the understanding of flood risk in a region and thereby contribute to enhanced risk management of, for example, risk analysts and policymakers or insurance companies. The modeling framework was successfully applied in a proof‐of‐concept exercise in Vorarlberg (Austria). The results of the case study show that risk analysis has to be based on spatially heterogeneous flood events in order to estimate flood risk adequately.     

Understanding Household Preferences for Hurricane Risk Mitigation Information: Evidence from Survey Responses

Risk information is critical to adopting mitigation measures, and seeking risk information is influenced by a variety of factors. An essential component of the recently adopted My Safe Florida Home (MSFH) program by the State of Florida is to provide homeowners with pertinent risk information to facilitate hurricane risk mitigation activities. We develop an analytical framework to understand household preferences for hurricane risk mitigation information through allowing an intensive home inspection. An empirical analysis is used to identify major drivers of household preferences to receive personalized information regarding recommended hurricane risk mitigation measures. A variety of empirical specifications show that households with home insurance, prior experience with damages, and with a higher sense of vulnerability to be affected by hurricanes are more likely to allow inspection to seek information. However, households with more members living in the home and households who live in manufactured/mobile homes are less likely to allow inspection. While findings imply MSFH program's ability to link incentives offered by private and public agencies in promoting mitigation, households that face a disproportionately higher level of risk can get priority to make the program more effective.     

Stakeholder Views on Flood Risk Management in Hungary''s Upper Tisza Basin

With escalating costs of flood mitigation and relief, a challenge for the Hungarian government is to develop a flood mitigation and insurance/relief system that is viewed as efficient and fair by the many stakeholders involved. To aid policymakers in this task, this article reports on a recent study to elicit stakeholder views on flood risk management in the Upper Tisza Basin, including views on appropriate means of reducing losses and for transferring the residual losses from the direct victims to taxpayers or an insurance pool. This study is part of a project to develop an integrated approach to flood risk management coordinated by the International Institute of Applied Systems Analysis (IIASA) in collaboration with Swedish and Hungarian researchers. The discussion begins by describing the background of flood risk management problems in the Upper Tisza Basin. The results of interviews carried out with selected key stakeholders and the results of a public survey eliciting views on flood risk management are reported. The final section draws conclusions on incorporating stakeholder views into a flood risk management model, which will be used to illustrate policy paths at an upcoming stakeholder workshop. The conclusions are also of direct interest to Hungarian policymakers.     

Are We Adapting to Floods? Evidence from Global Flooding Fatalities

There has been a growing interest in understanding whether and how people adapt to extreme weather events in a changing climate. This article presents one of the first empirical analyses of adaptation to flooding on a global scale. Using a sample of 97 countries between 1985 and 2010, we investigate the extent and pattern of flood adaptation by estimating the effects of a country's climatological risk, recent flood experiences, and socioeconomic characteristics on its flood‐related fatalities. Our results provide mixed evidence on adaptation: countries facing greater long‐term climatological flooding risks do not necessarily adapt better and suffer fewer fatalities; however, after controlling for the cross‐country heterogeneity, we find that more recent flooding shocks have a significant and negative effect on fatalities from subsequent floods. These findings may suggest the short‐term learning dynamics of adaptation and potential inefficacy of earlier flood control measures, particularly those that promote increased exposure in floodplains. Our findings provide important implications for climate adaptation policy making and climate modeling.     

Seeing is Believing? Evidence from Property Prices in Inundated Areas

We use hedonic property models to estimate the changes in implicit flood risk premium following a large flood event. Previous studies have used flood hazard maps to proxy flood risk. In addition to knowing whether a property lies in the floodplain, we use a unique data set with the flood inundation map. We find that the price discount for properties in the inundated area is substantially larger than in comparable properties in the floodplain that did not get inundated. This suggests that, in addition to capturing an information effect, the larger discount in inundated properties reflects potential uninsurable flood damages, and supports a hypothesis that homeowners respond better to what they have visualized (“seeing is believing”).     

Communicating Earthquake Preparedness: The Influence of Induced Mood,Perceived Risk,and Gain or Loss Frames on Homeowners’ Attitudes Toward General Precautionary Measures for Earthquakes

Despite global efforts to reduce seismic risk, actual preparedness levels remain universally low. Although earthquake‐resistant building design is the most efficient way to decrease potential losses, its application is not a legal requirement across all earthquake‐prone countries and even if, often not strictly enforced. Risk communication encouraging homeowners to take precautionary measures is therefore an important means to enhance a country's earthquake resilience. Our study illustrates that specific interactions of mood, perceived risk, and frame type significantly affect homeowners’ attitudes toward general precautionary measures for earthquakes. The interdependencies of the variables mood, risk information, and frame type were tested in an experimental 2 × 2 × 2 design (N = 156). Only in combination and not on their own, these variables effectively influence attitudes toward general precautionary measures for earthquakes. The control variables gender, “trait anxiety” index, and alteration of perceived risk adjust the effect. Overall, the group with the strongest attitudes toward general precautionary actions for earthquakes are homeowners with induced negative mood who process high‐risk information and gain‐framed messages. However, the conditions comprising induced negative mood, low‐risk information and loss‐frame and induced positive mood, low‐risk information and gain‐framed messages both also significantly influence homeowners’ attitudes toward general precautionary measures for earthquakes. These results mostly confirm previous findings in the field of health communication. For practitioners, our study emphasizes that carefully compiled communication measures are a powerful means to encourage precautionary attitudes among homeowners, especially for those with an elevated perceived risk.     

Integrating Household Risk Mitigation Behavior in Flood Risk Analysis: An Agent‐Based Model Approach

Recent studies showed that climate change and socioeconomic trends are expected to increase flood risks in many regions. However, in these studies, human behavior is commonly assumed to be constant, which neglects interaction and feedback loops between human and environmental systems. This neglect of human adaptation leads to a misrepresentation of flood risk. This article presents an agent‐based model that incorporates human decision making in flood risk analysis. In particular, household investments in loss‐reducing measures are examined under three economic decision models: (1) expected utility theory, which is the traditional economic model of rational agents; (2) prospect theory, which takes account of bounded rationality; and (3) a prospect theory model, which accounts for changing risk perceptions and social interactions through a process of Bayesian updating. We show that neglecting human behavior in flood risk assessment studies can result in a considerable misestimation of future flood risk, which is in our case study an overestimation of a factor two. Furthermore, we show how behavior models can support flood risk analysis under different behavioral assumptions, illustrating the need to include the dynamic adaptive human behavior of, for instance, households, insurers, and governments. The method presented here provides a solid basis for exploring human behavior and the resulting flood risk with respect to low‐probability/high‐impact risks.     

Quantifying Riverine and Storm‐Surge Flood Risk by Single‐Family Residence: Application to Texas

The development of catastrophe models in recent years allows for assessment of the flood hazard much more effectively than when the federally run National Flood Insurance Program (NFIP) was created in 1968. We propose and then demonstrate a methodological approach to determine pure premiums based on the entire distribution of possible flood events. We apply hazard, exposure, and vulnerability analyses to a sample of 300,000 single‐family residences in two counties in Texas (Travis and Galveston) using state‐of‐the‐art flood catastrophe models. Even in zones of similar flood risk classification by FEMA there is substantial variation in exposure between coastal and inland flood risk. For instance, homes in the designated moderate‐risk X500/B zones in Galveston are exposed to a flood risk on average 2.5 times greater than residences in X500/B zones in Travis. The results also show very similar average annual loss (corrected for exposure) for a number of residences despite their being in different FEMA flood zones. We also find significant storm‐surge exposure outside of the FEMA designated storm‐surge risk zones. Taken together these findings highlight the importance of a microanalysis of flood exposure. The process of aggregating risk at a flood zone level—as currently undertaken by FEMA—provides a false sense of uniformity. As our analysis indicates, the technology to delineate the flood risks exists today.