Accessible Unlicensed Requires Authentication Published by De Gruyter September 1, 2017

Does the National Flood Insurance Program Have Redistributional Effects?

Okmyung Bin, John Bishop and Carolyn Kousky

Abstract

This study examines possible redistributional effects of the National Flood Insurance Program (NFIP), using a nationwide database of flood insurance policies and claims between 2001 and 2013 from the Federal Emergency Management Agency. Applying methods from the tax and transfer progressivity literature, we use the departure from per capita income proportionality at the zip code level as our measure of progressivity. Our findings indicate that premiums as a percentage of coverage purchased are regressive: premium shares are larger than income shares for lower-income zip codes. Payouts, however, also as a percentage of coverage purchased, are progressive, meaning lower-income zip codes receive a larger portion of claims paid. Overall net premiums (premiums – payouts) divided by coverage are also regressive. Our findings are driven by certain aspects of the current rate structure of the NFIP, as well as how income is related to risk. We discuss potential policies to provide assistance to lower-income households in purchasing flood insurance.

JEL Classification: D31; G22; Q54; R38

References

Bin, O., J. Bishop, and C. Kousky. 2012. “Redistributional Effects of the National Flood Insurance Program.” Public Finance Review 40 (3):360–380.10.1177/1091142111432448Search in Google Scholar

Bishop, J. A., K. V. Chow, and J. P. Formby. 1994. “A Large Sample Test for Differences between Lorenz and Concentration Curves.” International Economic Review 35:479–488.Search in Google Scholar

Bishop, J. A., H. Liu, and B. Zheng. 2010. “Rising Incomes and Nutritional Inequality in China.” Studies in Applied Welfare Analysis: Papers from the Third ECINEQ Meeting. Research on Economic Inequality 18: 257–266.Search in Google Scholar

Bump, P. 2014. “You are Subsidizing a Fancy Beach House that Will Be Destroyed in a Flood.” The Atlantic. February 18.Search in Google Scholar

Coronado, J., D. Fullerton, and T. Glass. 2011. “The Progressivity of Social Security.” The B.E. Journal of Economic Analysis & Policy 11 (1):1–45.Search in Google Scholar

Dixon, L., N. Clancy, B. M. Miller, S. Hoegberg, M. M. Lewis, B. Bener, S. Ebinger, M. Hodges, G. M. Syck, C. Nagy, and S. R. Choquette. 2017. The Cost and Affordability of Flood Insurance in New York City: Economic Impacts of Rising Premiums and Policy Options for One- to Four-Family Homes. Santa Monica, CA: RAND Corporation.Search in Google Scholar

Dixon, L., N. Clancy, S. A. Seabury, and A. Overton. 2006. The National Flood Insurance Program’s Market Penetration Rate: Estimates and Policy Implications. Santa Monica, CA: RAND Corporation. February.Search in Google Scholar

Gall, M., K. A. Borden, C. T. Emrich, and S. Cutter. 2011. “The Unsustainable Trend of Natural Hazard Losses in the United States.” Sustainability 3:2157–2181.10.3390/su3112157Search in Google Scholar

GAO. 2013. Flood Insurance: More Information Needed on Subsidized Properties. Washington, DC: Government Accountability Office. July.Search in Google Scholar

Garcia-Diaz, D. 2014. Testimony to the Subcommittee on Housing and Insurance, Committee on Financial Services, House of Representatives. Washington, DC: Government Accountability Office. April 9.Search in Google Scholar

Hayes, T. L., and D. A. Neal. 2011. Actuarial Rate Review: In Support of the Recommended October 1, 2011, Rate and Rule Changes. Washington, DC: Federal Emergency Management Agency.Search in Google Scholar

Holladay, J. S., and J. A. Schwartz. 2010. Flooding the Market: The Distributional Consequences of the NFIP. New York, NY: Institute for Policy Integrity, New York University School of Law.Search in Google Scholar

Kakwani, N. C. 1977. “Measurement of Tax Progressivity: An International Comparison.” Economic Journal 87:71–80.10.2307/2231833Search in Google Scholar

Kousky, C., and H. Kunreuther. 2014. “Addressing Affordability in National Flood Insurance Program.” Journal of Extreme Events 1 (1):1450.Search in Google Scholar

Kousky, C., and E. Michel-Kerjan. 2015. “Examining Flood Insurance Claims in the United States.” Journal of Risk and Insurance doi:10.1111/jori.12106.Search in Google Scholar

Kousky, C., and L. Shabman. 2014. “Pricing Flood Insurance: How and Why the NFIP Differs from a Private Insurance Company.” RFF Discussion Paper 14-37. Washington, DC: Resources for the Future.Search in Google Scholar

Kriesel, W., and C. Landry. 2004. “Participation in the National Flood Insurance Program: An Empirical Analysis for Coastal Properties.” Journal of Risk and Insurance 71 (3):405–420.10.1111/j.0022-4367.2004.00096.xSearch in Google Scholar

Lambert, P. J. 2002. The Distribution and Redistribution of Income. Manchester and New York: Manchester University Press.Search in Google Scholar

Lerman, R. I., and S. Yitzhaki. 1989. “Improving the Accuracy of Estimates of Gini Coefficients.” Journal of Econometrics 42 (1):43–47.10.1016/0304-4076(89)90074-2Search in Google Scholar

Logue, K. D., and O. Ben-Shahar. 2015. “The Perverse Effects of Subsidized Weather Insurance.” Law & Economics Working Papers. Paper 111.Search in Google Scholar

McGuire, C., M. Goodman, and J. Wright. 2015. “Subsidizing Risk: The Regressive and Counterproductive Nature of National Flood Insurance Rate Setting in Massachusetts.” PPC Working Paper Series- Working Paper No. ENV-2015-01.Search in Google Scholar

National Research Council (NRC). 2015. Affordability of National Flood Insurance premiums: Report 1. Washington, DC: National Academies Press.Search in Google Scholar

New York City. 2013. A Stronger, More Resilient New York. New York City: Special Initiative for Rebuilding and Resiliency.Search in Google Scholar

O’Donnell, O., E. Van Doorslaer, A. Wagstaff, and M. Lindelow. 2008. Analyzing Health Equity Using Household Survey Data: A Guide to Techniques and Their Implementation. Washington, DC: World Bank Group.Search in Google Scholar

Pociask, S. 2014. “Flood Insurance Welfare for the Rich.” The Daily Caller. February 25.Search in Google Scholar

Published Online: 2017-9-1

© 2017 Walter de Gruyter GmbH, Berlin/Boston