Is it a good idea to subsidize flood insurance?
Abstract
To mitigate the rising costs of flood insurance, several high-income countries have implemented subsidies to lower premiums in high-risk areas. While helping mobility-constrained, low-income homeowners afford insurance, these policies come at the cost of distorting incentives to locate in flood-prone areas. In this paper, I measure the benefits and costs of subsidizing insurance. I conduct the analysis for France, one of the countries subsidizing flood insurance to the largest extent. First, leveraging unique fine-grain data for the universe of dwellings and households, I provide new stylized facts on flood risk exposure by occupancy status: owner-occupied, rental and second homes. Second, historical data at the French-German border allows me to identify the effects of the 1982 implementation of the French system on new construction projects. Third, I incorporate these mechanisms into a quantitative spatial model where households have heterogeneous income and occupancy status. I find that even with a utilitarian welfare function, subsidizing insurance may be justified if homeowners are not perfectly mobile. This paper offers policymakers a framework, as well as estimates, to think about the effects of subsidizing insurance.
