Is it a good idea to subsidize flood insurance? Evidence from France
Abstract
Climate change drives up the cost of flood insurance coverage for homeowners. To mitigate these costs, many governments have opted to subsidize insurance. At the same time, reducing the cost of insurance in flood risk areas gives incentives for inefficient housing development in these places. In this paper, I recover the set of welfare weights that justify implementing the French subsidized insurance system. Leveraging unique fine-grain data in France for the universe of dwellings and households, I provide new stylized facts on exposure to flood risk by occupancy status, including owner-occupied, rental and second homes. I use these findings to simulate a quantitative spatial model with heterogeneous households, characterized by their income and dwelling’s occupancy type. Results suggest that if barriers to mobility are high for low-income homeowners, a standard utilitarian welfare function may already justify subsidizing insurance. This paper offers policymakers insights on the benefits and costs of subsidizing insurance and highlights the need to address inequalities in flood insurance design.
