Here’s Why Flood Insurance Won’t Encourage People to Build More Resilient Homes

This thought provoking piece from challenges the belief that lower flood insurance premiums push people toward flood-proof retrofits.

flooded house photo
Photo by Seattle Municipal Archives

As reported by Carolyn Kousky at

Disasters are everywhere; nowhere seems immune. According to climate scientists, it will just get worse as the planet warms.

Economist Michael Greenstone, who runs the Energy Policy Institute, argued last month in the New York Times that if insurance prices reflected risk, they could incentivize homeowners to undertake retrofits needed to protect their homes. The argument, which has been made by others, is that if insurance costs less for safer homes, homeowners will undertake protective measures to realize those savings.

Unfortunately, it’s not that simple.

There are three reasons why risk-based insurance alone is not enough to solve our climate adaptation problems.

First, very few people buy disaster insurance voluntarily

Price discounts for hazard mitigation only create incentives for those who actually pay for insurance. Greenstone holds up the California Earthquake Authority (CEA) as the gold standard of risk-based pricing that can incentivize earthquake retrofits, but only about 10 percent of residences (PDF) in that state are protected against earthquakes. For flood insurance, too, take-up rates are dismally low in areas where purchase is voluntary (see estimates here, here and here).

This presents a real conundrum. Disaster insurance priced to truly reflect the risk can be (PDF) costly (PDF). There are not many reliable estimates of how disaster insurance demand changes as the cost of the insurance goes up, but some evidence suggests people may stop buying insurance when costs (PDF) rise (PDF).

Read More of the Original Article: Minding the gap between insurance and flood risk | GreenBiz

Photo by michael.po

Photo by .waldec

Photo by Seattle Municipal Archives

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