Could Flood Insurance be Privatised in the United States? A Primer

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Finance Papers
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insurance pricing
catastrophe model
flood insurance
NFIP
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Finance and Financial Management
Insurance
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Michel-Kerjan, Erwann
Czajkowski, Jeffrey
Kunreuther, Howard
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Since 1968, homeowners’ flood insurance in the United States has been mainly provided through the federally-run National Flood Insurance Program (NFIP). The Flood Insurance Reform Act of 2012 raises the possibility of moving coverage to the private sector, assuming the market can price this risk effectively and that premiums reflect risk. This paper provides the first large-scale quantification of risk-based premiums for over 300,000 residences prone to either storm surge or inland flooding using commercially developed probabilistic catastrophe models, and compares these premiums with those currently charged by the NFIP. Our findings reveal significant differences between the two. In some areas, the NFIP charges prices that are more than 15 times the pure premium, while other areas are charged up to three times less than the pure premium. The paper discusses the market and policy implications of these findings.

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2015-04-01
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The Geneva Papers on Risk and Insurance - Issues and Practice
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