The Relationship Between Deductibles and Wealth: The Case of Flood Insurance

This paper examines the effect of wealth on the demand for deductibles both theoretically and empirically for the case of flood insurance. Our study provides a synthesis and empirical examination of the economic theory of deductibles and its relationship with wealth. Previous articles have not examined these issues empirically, in particular for the specific case of flood insurance. We concentrate on extending the economic theory of deductibles and its relationship with wealth to the specific case of flood insurance. An enormous accounting database from the National Flood Insurance Program (NFIP), which includes more than 3.2 million insureds in 1998, is used in this study. The empirical findings demonstrate that about 63 percent of the insureds buy the minimum mandatory deductible, regardless of wealth, and about 37 percent of the insureds buy higher deductible as wealth increases. Preliminary regressions show that for the first group of insureds, the deductible is not significantly associated with wealth and the hazard zone (the flood risk). However, the major regression analyses demonstrate that for the second group of insureds, the amount of deductible selected is positively associated with increasing wealth and negatively associated with increasing the flood risk. For this second group, the overall regressions and the estimated coefficients for the explanatory variables are statistically significant.