To improve is to change: The effects of Risk Rating 2.0 on flood insurance demand

Abstract

We present a model of the demand for flood insurance, construct individual insurance histories for the universe of policyholders, and empirically analyze the effects of the latest NFIP reform (known as Risk Rating 2.0). The reform increased exits, both in the flood zone and its periphery, particularly among policyholders with subsidized rates and those paying the highest premiums. The reform also reduced new entry, had highly heterogeneous effects on insurance costs and triggered adjustments in deductibles, generally shifting flood risk toward policyholders in exchange for lower premiums. While the reform may have improved the solvency of the NFIP, it has exacerbated the decade-long decline in enrollment.