The effect of subsidized flood insurance on real estate markets

Abstract

Subsidized insurance against extreme weather events improves affordability among households in at‐risk areas but it can weaken the risk signal via property prices. Leveraging a granular data set of all property transactions and flood events in England, we study the effects of a reinsurance scheme that lowers insurance premiums for at‐risk properties. We document that the introduction of this scheme increases prices and transaction volumes of flood‐prone properties. This fully offsets the negative direct effects of flooding on property prices, with high‐income areas and high‐value properties benefiting relatively more. Our findings speak to the debate on climate adaptation policies and their consequences for wealth distribution.