Erwann Michel-Kerjan, Ben Collier, Wouter Botzen
July 2013 to June 2015
Floods are the one natural disaster where the federal government currently plays a major role in designing and implementing strategies for reducing future losses and aiding financial recovery, through the National Flood Insurance Program (NFIP). Hurricane Sandy triggered $60 billion in federal relief; the NFIP had to borrow nearly $10 billion from the Treasury to pay its claims, increasing its debt to nearly $27 billion. Encouraging organizations and individuals to adopt risk reduction measures that will improve economic recovery after a disaster is a national priority. Insurance has a critical role to play in national resilience as it provides the necessary safety net to facilitate a rapid recovery following a disaster while at the same time providing a signal of risk and encouraging adoption of loss reduction measures prior to a disaster. Public-private partnerships such as the NFIP can encourage investment in protective measures, deal with affordability problems and provide coverage for catastrophic risks. Moreover, improving our understanding of how individuals perceive and respond to low-probability, high-consequence risks is of considerable importance. In particular, improving insights into how perceptions of probabilities and damage of such events relate to the objective probability and damage can guide the design of policies to help people make better risk assessments and precautionary decisions. The PIs benefit from unique access to the NFIP’s policy portfolio to undertake studies with practical relevance for how the federal government could improve protection before the next disaster. This ongoing research with CREATE on flood risk insurance in the U.S. is conducted in close collaboration with the top management of FEMA at the U.S. Department of Homeland Security. Study 1. Divergence between Individual Perceptions and Objective Indicators of Tail Risks: Evidence from Floodplain Residents in New York City Six months after Hurricane Sandy, we surveyed homeowners in New York City who live in a flood-prone area about their flood risk perceptions and flood insurance purchases. The survey was completed by 1,035 people who own a home with a ground floor in a flood-prone area of New York City. Respondents were asked over 100 questions on the following topics: flood risk perceptions, motivations for flood preparedness activities, flood insurance purchases, flood risk mitigation measures implemented and their socio-demographic characteristics. The study finds that:
- Most respondents perceive the flood risk to be high: 86% of the respondents believe that they live in a flood-prone area. However, most underestimate the damage a flood could cause to their residence.
- Over 40% of respondents expect that climate change will not increase their flood risk in the future. This finding suggests that many people are not in line with the scientific consensus about the projected climate change impact of increased storm surge and sea level rise on flood risk in New York City.
- Only 21% bought flood insurance voluntarily. 44% of respondents stated they purchased flood insurance because it was mandatory. 33% did not have coverage, and 2% did not know whether they had flood coverage.
- Instead of framing the chances of a flood as 1-in-100 in any given year, inform residents that the chances are greater than 1-in-5 (20%) of flooding in the next 25 years.
- Highlight the financial consequences if a flood occurs and the homeowner is uninsured. (FEMA flood maps currently depict only the likelihood of a flood without depicting the resulting damage should a flood occur.)