Risk Preferences, Risk Perceptions, and Flood Insurance

Abstract

We combine household-level data on the choice to purchase flood insurance with experiment-based risk preference data and subjective risk perception data. The sample covers a wide geographic area (the entire U.S. Gulf Coast and Florida's Atlantic Coast) and includes individuals exposed to varying levels of risk. This work represents one of very few analyses to do so. Results indicate that our experiment-based measure of risk aversion over the loss domain positively and significantly correlates with the decision to purchase a flood policy, as do perceived expectations of hurricane damage, eligibility for disaster assistance, and credibility of insurance providers. (JEL D81, R22)

Farmers’ Risk Preferences and Agricultural Weather Index Insurance Uptake in Rural China

“…In other words, a risk-averse farmer would be more willing to buy the agricultural weather index insurance. This is consistent with standard economic theory and the existing literature on the linkage between individuals' risk preferences and insurance uptake decisions (Petrolia et al 2013;Simon and Fiorentino 2014). Thus, it can be anticipated that more risk-averse individuals, such as female farmers, would be more likely to take up the weather index-based insurance.…”

“…This finding is expected and understandable. If individuals consider that the probability or potential magnitude of loss is low, insurance may appear unattractive, even at subsidized rates (Petrolia et al 2013). The literature also shows that individuals often underestimate the risk (Camerer and Kunreuther 1989;Chivers and Flores 2002;Kunreuther 2006).…”

“…The number of studies that looked into the factors that might influence farmers' decisions on purchasing agricultural insurance are growing (Sherrick et al 2004;Petrolia et al 2013;Simon and Fiorentino 2014;Ye et al 2016). Because of different climatic, economic, political, and institutional conditions, farmers' participation decisions on agricultural insurance and their determinants may be different in different countries and regions (Hisali et al 2011).…”

Local capacity and resilience to flooding: community responsiveness to the community ratings system program incentives

“…The CRS program resembles conventional environmental policy as a top-down directive or subsidy, but it departs from typical US federal environmental policy in that it bypasses state governments, directly targets local governments, and ostensibly promotes provision of local commons-community flood resilience. Even as major programs like the NFIP emphasize insurance for private property owners (FEMA 2011), Landry and Jahan-Parvar (2011), Petrolia et al (2013), and Poussin et al (2014) focus on flood mitigation activities of individual households, but did not examine how CRS incentives affect what participating communities do. Much less is known about flood mitigation activities by communities.…”

Cost Mitigation of Natural Disasters Through Insurance

“…Social marketing could be used to bring about behavioral change in the perceptions of people towards adopting disaster insurance as a form of financial literacy. Petrolia, Landry, and Coble (2013) in their study of the impact of subjective risk perception and preference on the enrolment in flood insurance program is positively correlated with the risk aversion, the perceived expected loss, eligibility for disaster assistance, and credibility of insurance providers. They found that mitigation efforts through Community Rating Systems (CRS) 1 generally improved the insurance penetration levels.…”