Examining Flood Insurance Claims in the United States: Six Key Findings

• Published date: 01 September 2017
• DOI: http://doi.org/10.1111/jori.12106
• Date: 01 September 2017

© 2015 The Journal of Risk and Insurance. Vol. 84, No. 3, 819–850 (2017).

DOI: 10.1111/jori.12106

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EXAMINING FLOOD INSURANCE CLAIMS IN THE UNITED

STATES:SIX KEY FINDINGS

Carolyn Kousky

Erwann Michel-Kerjan

ABSTRACT

We undertake the first large-scale analysis of flood insurance claims in the

United States, analyzing over 1 million claims from the federally managed

National Flood Insurance Program (NFIP) over the period 1978–2012. Using

fixed effects regressions and other statistical analyses, we test several

hypotheses about the nature and drivers of flood claims (e.g., the impact of

flood zone, characteristics of the house, individual and collective mitigation,

and repetitive loss properties), as well as uncover quantitative relationships

on the determinants of claims payments. We also examine how claims are

distributed across time and space. Our findings, several surprising, provide

a quantitative basis for exploring the challenges associated with low

insurance demand and also can contribute to more informed policy decisions

regarding reform of the NFIP, as well as flood insurance markets around the

world.

We thank the U.S. Federal Emergency Management Agency (Recovery Directorate and the

Federal Insurance and Mitigation Administration) for data used in this research. We are

grateful to Andy Neal, Ed Pasterick, Tim Scoville, and Roy Wright at FEMA for many

discussions on the practical operation of the NFIP. We thank Keith Crocker and the two

referees, as well as Wouter Botzen, Jeff Brown, Benjamin Collier, Roger Cooke, Jeffrey

Czajkowski, Linda Freiner, Howard Kunreuther, Leonard Shabman and Michael Szoenyi for

insightful comments on an earlier version of this article. We also thank attendees of the

Wharton Risk Center’s Flood Insurance Workshop in 2014. Carol Heller provided excellent

editorial support. This work is partially supported by the Zurich Insurance Foundation, the

Center for Risk and Economic Analysis of Terrorism Events (CREATE) at the University of

Southern California (U.S. Department of Homeland Security’s Center of Excellence), the

National Science Foundation (SES-1062039/1061882), the Travelers-Wharton Partnership for

Risk Management Fund, and the Wharton Risk Management and Decision Processes Center.

Carolyn Kousky is at Resources for the Future, 1616 P Street NW, Washington, DC 20036. The

author can be contacted via e-mail: kousky@rff.org. Erwann Michel-Kerjan is with the

Center for Risk Management and Decision Processes, Wharton School, University of

Pennsylvania, 3730 Walnut Street, Suite 500, Philadelphia, PA 19104. The author can be

contacted via e-mail: erwannmk@wharton.upenn.edu.

820 THE JOURNAL OF RISK AND INSURANCE

INTRODUCTION

Recent catastrophes hav e inflicted significant eco nomic losses. The global ave rage

cost of natural disaster s between 2000 and 2012 has been estimated to be around

$100 billion per year (Kousk y, 2014). During the period 200 1 to 2010, insured

losses from weather-r elated disasters averag ed $30 billion annually ( Swiss Re,

2011). Of all natural disa sters, floods are the most co stly (Miller, Muir-Wood, and

Boissonnade, 2008) and h ave affected the most peopl e (Stromberg, 2007). This is

true worldwide, as well as in th e United States, where floods acc ounted for the

most lives lost and the highest amount of property damage over the 20th century

(Perry, 2000).

In the United States, residential flood insurance has been available through the

federally managed National Flood Insurance Program (NFIP) since 1968.

1

Recent

disasters—Hurricanes Katrina in 2005, Ike in 2008, and Sandy in 2012—triggered

significant amounts of flood-related losses and more than $25 billion in insured claims

from NFIP policyholders (Kunreuther and Michel-Kerjan, 2013). Hurricane Katrina

alone triggered more flood insurance claims payments by the NFIP ($16 billion) than

had been made over the life of the program to that point. The program is now deeply

in debt to the U.S. Treasury.

These recent disasters ren ewed interest in the U.S. flood insurance market by the

academic community, po licymakers, and the private insurance marke t, as shown by

an increase in NFIP scho larship and policy debat e. Some research was commi s-

sioned by the U.S. government, even before Hurricane Katrina hit, to examine

insurance take-up rat es in the program and the NFIP’s impact on development (e.g.,

Blais et al., 2006; Dixon et al. , 2006; Galloway et al., 2006). Academic s have focused on

examining the demand for flo od insurance (e.g., Browne and Hoyt, 2000; Michel-

Kerjan and Kousky, 2010; Kou sky, 2011; Landry and Jahan-Pa rvar, 2011; Petrolia,

Landry, and Coble, 2013; A treya, Ferrera, and Miche l-Kerjan, 2015), the over all

operation of the program a nd alternative design opti ons (Michel-Kerjan, 2010 ;

Michel-Kerjan and Kunreu ther, 2011), flood insurance pricing (Czajkowski,

Kunreuther, and Miche l-Kerjan, 2012; Kousky and Shabman, 2014), as well as

estimating how flood risk and flood insurance might influen ce property values

(e.g., Bin and Polasky, 200 4; Kousky 2010; Atreya, Ferr eira, and Kriesel,2013;

Bin and Landry, 2013). To date, howe ver, there has been almost no wor k on flood

insurance claims. While sc holars might have some intu itive notions of the nature

of flood insurance claims , there has not yet been a deta iled analysis of claims pai d

overthelifeoftheNFIP.Inpartthisisbecausethedatahavenotbeenpublicly

available.

Benefiting from unique access to the NFIP claims database, we present in this paper

the first large-scale analysis of all the residential NFIP claims filed between

January 1978 and the end of December 2012: a total of over 1 million claims distributed

across the entire United States over this 35-year period.

1

There is a very small private market as well, often above the $250,000 limit available from the

federal program for building coverage, although a few insurance firms do write full flood

policies (Dixon et al., 2007).

EXAMINING FLOOD INSURANCE CLAIMS IN THE UNITED STATES 821

Using fixed effects regressions and other statistical analyses of the claims database,

we test several hypotheses about the influence of various factors on claims, as well as

uncover quantitative relationships on the determinants of claims payments. We

discuss our hypotheses when we provide background on the specifics of the NFIP;

they address the role of risk, type of flooding, hazard mitigation, and other variables

on claim payments in terms specific to the structure of the NFIP. In addition, we

examine how claims are distributed across time and space. We primarily examine

single-family building claims as a percent of building value, but also examine

uncorrected claims (i.e., total dollar amount of the paid claim) and claims as a

percentage of coverage levels.

The paper is organized as follows. The next section introduces the NFIP, focusing on

aspects that are relevant to this article. We also present our research hypotheses in the

context of the overall design and operation of the program. We then discuss our data,

provide summary statistics of our key variables, as well as a better understanding of

the average claim amount, number of claims, and claim rate over time, both overall

and in high- versus low-risk zones. We then give an overview our methods and

provide our results. The final section summarizes our findings, discusses policy

implications, and concludes.

BACKGROUND ON FLOOD INSURANCE IN THE UNITED STATES:RESEARCH HYPOTHESES

The NFIP was established in the United States in 1968, partially in response to a lack of

private sector availability of flood coverage. Due to the catastrophic nature of the

peril, the spatial correlation of claims, and the difficulty in addressing adverse

selection, private flood insurance has been largely unavailable in the United States

since the large 1927 Mississippi flood (Gerdes, 1963; Anderson, 1974). Creation of the

NFIP was also driven by concerns about the increasing burden that uninsured victims

of flood were putting on the federal government through disaster relief (see Michel-

Kerjan, 2010, for a review of the first 40 years of operation of the program).

The NFIP, currently housed in the Federal Emergency Management Agency (FEMA),

is designed to be a partnership between the federal government, communities, and

insurers. Communities can join the program, adopting minimum floodplain

development regulations; flood insurance is then made available to homeowners

and small businesses in those communities. As currently structured, 90-plus private

insurance companies partner with FEMA to write NFIP flood insurance policies and

process flood claims on behalf of the NFIP in exchange for a fee, allowing the federal

government to benefit from the insurers’ network and outreach. Insurers are only

financial intermediaries, though; the NFIP sets prices and bears all the risk.

Today, over 22,000 communities across the United States participate in the program,

covering almost all areas of flood risk in the country. Homeowners in these

communities can insure their homes for up to $250,000 in building coverage, a limit

that has remained unchanged since 1994. In addition, they can choose to purchase up

to $100,000 in contents coverage.

The program has grown significantly over time. The total property value insured was

$178 billion in 1978, $375 billion in 1990, and more than $755 billion in 2000 (all in 2012