Adaptation and Adverse Selection in Markets for Natural Disaster Insurance
- (pp. 380-421)
Abstract
This paper quantifies frictions in uptake, tests for adverse selection, and analyzes welfare effects of proposed reforms in natural disaster insurance markets. I find that willingness to pay is remarkably low. In high-risk flood zones, fewer than 60 percent of homeowners purchase flood insurance even though premiums are only two-thirds of own costs. Estimating flood insurance demand and cost elasticities using house-level variation in premiums from recent US congressional reforms reveals that these homeowners select into insurance based on observable differences in adaptation but not private information about risk. These findings change the sign of predicted welfare effects of proposed policies.Citation
Wagner, Katherine R H. 2022. "Adaptation and Adverse Selection in Markets for Natural Disaster Insurance." American Economic Journal: Economic Policy, 14 (3): 380-421. DOI: 10.1257/pol.20200378Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- G22 Insurance; Insurance Companies; Actuarial Studies
- Q54 Climate; Natural Disasters and Their Management; Global Warming
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