Measuring flood underinsurance in the USA

Abstract

Flood insurance could mitigate the negative shock from climate-induced disasters, yet many households are still not covered. Here, using data on expected flood damage and National Flood Insurance Program policies, we provide estimates of annual flood risk protection gaps and underinsurance among single-family residences in the contiguous USA. Annually, 70% (US$17.1 billion) of total flood losses would be uninsured. Underinsurance, defined as protection gaps among properties whose current coverage is under the optimal level, totals US$15.7 billion annually. Among at-risk households, 88% are underinsured and average underinsurance is US$7,208 per year. Underinsurance persists both inside and outside the Federal Emergency Management Agency’s special flood hazard areas, suggesting frictions in the provision of risk information and regulatory compliance. Underinsurance falls disproportionately on low-income communities. At least 70% of at-risk households would benefit from purchasing flood insurance, even as prevailing prices rise. Homeowners could benefit from flood insurance to offset the negative impacts of climate-induced natural disasters. However, with detailed micro-level data, researchers find substantial protection gaps and underinsurance across the USA that disproportionately affect low-income households.