Wharton Research Scholars

Document Type

Working Paper

Date of this Version

5-7-2014

Abstract

In March 2014, Congress passed legislation to halt discounted flood insurance premiums from increasing to full-risk levels. The rate hike was authorized two years earlier by the Biggert-Waters Act to address the National Flood Insurance Program’s structurally induced $24 billion debt. The recent developments highlight the tension between risk-based premium and affordability of flood insurance for homeowners in flood-prone areas. This study seeks to understand how the tension can be resolved using a voucher program coupled with required mitigation in Charleston County, South Carolina. It specifically focuses on home elevation as the mitigation method. Compared to a simply insurance voucher program, the program can cut government expenditure on flood insurance vouchers by more than half when mitigation costs around $25,000 and policies are located in high hazard flood zones. In the most hazardous flood zones (V Zone), cost saving is achievable even when elevation costs as much as $75,000. Lastly, we found several conditions under which mitigation does not lead to reductions in voucher cost, such as when policyholder’s household income is below $10,000 or when elevation cost is high. Under such scenarios, insurance voucher for risk-based premium is still preferable to discounted premiums.

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Date Posted: 28 October 2014