Homeowner purchase of insurance for hurricane-induced wind and flood damage

Abstract

Understanding the circumstances under which homeowners will purchase insurance is critical to creating an effective insurance market for hurricane wind and flood loss. This paper contributes to the empirical literature on the subject through an analysis of survey data for homeowners in North Carolina. We develop separate mixed logit models for flood insurance and wind insurance purchasing decisions. The analysis uses stated preference data on the influence of premium and deductible to address some limitations of revealed preference data in which it is difficult to fully decouple effects of premium, deductible, risk, and coverage limit, and mandatory purchase requirements. The results for flood insurance and wind insurance are similar. We find evidence that the following are all significant and associated with higher probability of purchasing insurance-lower premium, lower deductible, more recent previous hurricane experience, location in a floodplain or closer to the coast, higher income, and younger homeowners. However, demand is relatively inelastic with respect to premium and deductible, and the willingness to pay for a $1 reduction in deductible varies throughout the population with some willing to pay more than $1, a behavioral anomaly. The recency of the last hurricane experience is more influential for homeowners who experienced damage than for homeowners who did not. Results suggest that insurance purchase and home retrofits are complements, not substitutes. Finally, the paper presents statistical models that can be used to predict insurance penetration rates for a region under different premium levels.

Homeowner Decisions to Retrofit to Reduce Hurricane-Induced Wind and Flood Damage

“…Despite the programs mentioned in previous section, little is known about how homeowners make retrofit decisions or the effect of monetary incentives on those decisions. While there is a significant and growing literature on protective action decision-making, it has primarily addressed activities associated with preparedness, recovery, insurance, and other types of mitigation, rather than decisions associated with structural retrofits (e.g., Bubeck et al 2012, Lindell and Perry 2012, Lindell et al 2009, Wang et al 2017. Retrofits are different in character, typically requiring more time, money, and expertise to implement, and in some cases, affecting the appearance or value of the house.…”

“…Bubeck et al (2012) and Poussin et al (2014, supplementary material) provide more extensive summaries of the literature on factors that influence mitigation behavior. Wang et al (2017) reviews it for the related decision of insurance purchase.…”

Flood risk management and shared responsibility: Exploring Canadian public attitudes and expectations

“…Although it is sometimes characterised as a “devolution” of government responsibilities (Meijerink & Dicke, ), sharing FRM responsibility is important, because it spreads the cost of risk reduction measures, ensures those who are protected by publicly funded flood controls pay their “fair share,” and creates an incentive for individuals and groups to take independent action to mitigate their flood risk and prepare for recovery after a flood (Thistlethwaite & Henstra, ). These actions typically involve implementing property‐level flood protection (PLFP) measures such as a installing a sump pump or grading soil away from the home, as well as purchasing insurance to defray flood‐related losses (Sandink, ; Wang, Davidson, Trainor, Nozick, & Kruse, ). However, existing research suggests that property‐owners are unlikely to adopt these protective behaviours unless they accept that they have a responsibility to contribute to flood mitigation and recovery (Doorn, ).…”

The Effects of Infrastructure Service Disruptions and Socio-Economic Vulnerability on Hurricane Recovery

“…In the early nineties, Bolin [44] reported on the correlation between earthquake insurance purchase with income, education and occupational status. With some exceptions [43], findings on the linkages between income and the purchase of insurance have persisted in studies on flood insurance [45][46][47][48] and in research related to wind insurance [49].…”