Finance Papers

Document Type

Journal Article

Date of this Version

4-2015

Publication Source

The Geneva Papers on Risk and Insurance - Issues and Practice

Volume

40

Issue

2

Start Page

179

Last Page

208

DOI

10.1057%2Fgpp.2014.27

Abstract

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.

Copyright/Permission Statement

The final publication is available at Springer via http://dx.doi.org/10.1057/gpp.2014.27

Keywords

insurance pricing, catastrophe model, flood insurance, NFIP

Embargo Date

10-29-2016

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Date Posted: 27 November 2017

This document has been peer reviewed.