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Pricing Flood Insurance: How and Why the NFIP Differs from a Private Insurance Company

Author

Listed:
  • Kousky, Carolyn

    (Resources for the Future)

  • Shabman, Leonard

    (Resources for the Future)

Abstract

Flood insurance in the United States is offered through the federal National Flood Insurance Program (NFIP). After going deeply into debt following the 2005 hurricane season, pricing in the program has been the subject of debate and two reform bills. Private sector insurance pricing has often been used as a benchmark in these discussions. In this paper, we explain NFIP pricing in the context of actuarial pricing principles, clarify why some polices are priced below what is considered to be the full risk rate, and explain how and, more importantly, why NFIP pricing practices differ from the private sector. NFIP pricing has incorporated other program goals that are at times at odds with the ability to cover all payouts for insured losses without taxpayer support. These multiple programmatic goals make the private sector a questionable analog for the NFIP.

Suggested Citation

  • Kousky, Carolyn & Shabman, Leonard, 2014. "Pricing Flood Insurance: How and Why the NFIP Differs from a Private Insurance Company," RFF Working Paper Series dp-14-37, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-14-37
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-14-37.pdf
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    Cited by:

    1. Robert Hartwig & Greg Niehaus & Joseph Qiu, 2020. "Insurance for economic losses caused by pandemics," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 45(2), pages 134-170, September.
    2. Xiao Lin, 2020. "Risk awareness and adverse selection in catastrophe insurance: Evidence from California’s residential earthquake insurance market," Journal of Risk and Uncertainty, Springer, vol. 61(1), pages 43-65, August.
    3. Benjamin L. Collier & Daniel Schwartz & Howard C. Kunreuther & Erwann O. Michel-Kerjan, 2017. "Risk Preferences in Small and Large Stakes: Evidence from Insurance Contract Decisions," NBER Working Papers 23579, National Bureau of Economic Research, Inc.
    4. Justin Tyndall, 2023. "Sea Level Rise and Home Prices: Evidence from Long Island," The Journal of Real Estate Finance and Economics, Springer, vol. 67(4), pages 579-605, November.
    5. Dinan, Terry, 2017. "Projected Increases in Hurricane Damage in the United States: The Role of Climate Change and Coastal Development," Ecological Economics, Elsevier, vol. 138(C), pages 186-198.
    6. Carolyn Kousky, 2017. "Disasters as Learning Experiences or Disasters as Policy Opportunities? Examining Flood Insurance Purchases after Hurricanes," Risk Analysis, John Wiley & Sons, vol. 37(3), pages 517-530, March.
    7. Benjamin L. Collier & Daniel Schwartz & Howard C. Kunreuther & Erwann O. Michel‐Kerjan, 2022. "Insuring large stakes: A normative and descriptive analysis of households' flood insurance coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 273-310, June.
    8. Benjamin L. Collier & Marc A. Ragin, 2020. "The Influence of Sellers on Contract Choice: Evidence from Flood Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 523-557, June.
    9. Georgic, Will C. & Klaiber, Allen, 2018. "Identifying the Costs to Homeowners of Eliminating NFIP Subsidies," 2018 Annual Meeting, August 5-7, Washington, D.C. 274444, Agricultural and Applied Economics Association.
    10. Bakkensen, Laura A. & Ma, Lala, 2020. "Sorting over flood risk and implications for policy reform," Journal of Environmental Economics and Management, Elsevier, vol. 104(C).
    11. Georgic, Will & Klaiber, H. Allen, 2022. "Stocks, flows, and flood insurance: A nationwide analysis of the capitalized impact of annual premium discounts on housing values," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    12. Bin Okmyung & Bishop John & Kousky Carolyn, 2017. "Does the National Flood Insurance Program Have Redistributional Effects?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(4), pages 1-11, October.

    More about this item

    Keywords

    flood insurance; rate-setting; NFIP; premiums;
    All these keywords.

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