Experimental evidence for coverage preferences in flood insurance
International Journal of Disaster Risk Science
Number of pages
This paper reports that demand for flood insurance appears to be negatively associated with the amount of insurance coverage. The researchers used a hypothetical choice experiment to estimate the effect of dwelling value and coverage limits on the probability of purchasing flood insurance while holding the probability of flooding and insurance price constant. For people assigned higher-valued dwellings, however, the opposite effect is observed. Since more coverage is generally preferred to less, all else being equal, differences in purchase probability dependent on dwelling value indicate an inconsistent approach to home protection. The higher probability of purchasing flood insurance from people in higher-valued dwellings may indicate an investment into the home as a financial asset, a strategy that is not observed to the same extent among people in lower-valued dwellings.
This suggests that use of coverage limits may be differentially preferred based on dwelling value, such that low coverage insurance may have lower uptake for those in high-valued dwellings. As Canada evaluates a national flood insurance program, this research suggests that variable coverage maximums could be a way to increase accessibility and uptake of insurance. This research shows an inconsistent demand for flood insurance, dependent on dwelling value and independent of income.