Climate Risk Perceptions and Demand for Flood Insurance

Abstract

Using detailed micro-level data, we show that individuals' beliefs about climate change influence their choice and level of flood insurance coverage. Our empirical strategy exploits the heterogeneous impact of widening partisan polarization on climate change beliefs after the 2016 general election. We find that, in areas where flood insurance is not mandatory, a one-standard-deviation drop in the fraction of adults who believe global warming is happening leads to a 26% drop in the demand for flood insurance. In areas where flood insurance is mandatory, a similar drop in beliefs is associated with a lower propensity to carry voluntary content coverage and a higher likelihood of choosing the maximum deductible amount. As a secondary test, we exploit the flood insurance premium increases due to the Biggert-Waters Flood Insurance Reform Act of 2012. We show that homeowners who do not believe global warming is happening were more likely to terminate mandatory flood insurance coverage by prepaying mortgages.