Is it a good idea to subsidize flood insurance? Evidence from risk pooling in France
Abstract
To make flood insurance affordable, several countries subsidize premiums in high-risk areas. This paper examines the effects of the French flood insurance policy, one of the most heavily subsidized systems, which mandates coverage and requires all households to pay premiums not indexed to risk exposure. Using fine-grained data on dwellings along the French-Belgian border, I analyze the 1982 implementation of this system and find a large increase in new construction in flood-prone areas, raising total flood costs by 1.5% since 1982. Despite these behavioral responses, subsidies may still benefit mobility-constrained households in high-risk areas. Using the reduced-form estimates, I calibrate a location choice model along with a social insurance framework to recover optimal subsidies. I also simulate how complementing subsidies with policies like land-use regulation and taxes on new constructions in flood-prone areas could enhance welfare. This study provides policymakers with new estimates and counterfactual policy options for offering flood insurance coverage.
