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Contact: Carl Pasurka, 202-566-2275

Presenter:  Andrew Royal (Resources for the Future)

Description:  Flooding is the most frequent environmental cause of economic losses in the US, and flood insurance is the most effective risk management tool that floodplain residents have at their disposable. Changes to the National Flood Insurance Program that call for increases in insurance rates, however, could reduce takeup of coverage among vulnerable homeowners. This study addresses the potential distributional impacts of rate changes by investigating the relationship between household wealth and insurance demand. By observing substitution patterns in deductible choice, we estimate existing policyholders’ sensitivity to changes in the cost of insurance across varying wealth levels; and, contrary to economic decision models that predict decreasing risk aversion in wealth, we find that wealthier homeowners are less sensitive to cost and willing to pay more for coverage.