Deductible Choice in Flood Insurance: Who Chooses the Maximum?

Timothy Dombrowski, R.Kelley Pace, Dimuthu Ratnadiwakara, V. Carlos Slawson

Research output: Contribution to journalArticlepeer-review

Abstract

<div class="line" id="line-7"> <span style='color: rgb(51, 51, 51); font-family: "Open Sans", sans-serif; font-size: 17.6px;'> Although some have proposed eliminating the National Flood Insurance Program (NFIP) to reduce government expenditures, other alternatives exist that could reduce the cost of the program and increase its viability, such as increasing deductibles, which may increase participation and revenue. The&ZeroWidthSpace; recently released&nbsp; </span> <i style='color: rgb(51, 51, 51); font-family: "Open Sans", sans-serif; font-size: 17.6px;'> FIMA NFIP Redacted Policies Data Set </i> <span style='color: rgb(51, 51, 51); font-family: "Open Sans", sans-serif; font-size: 17.6px;'> &nbsp;provides unprecedented opportunities to examine homeowner deductible choices for flood insurance policies using policy-level data. The menu of deductibles currently ranges from $1,000 to $10,000 in Special Flood Hazard Areas (SFHAs), but until April 1, 2015, the maximum deductible was $5,000. Using a matched sample of 252,280 SFHA policies that were active for the 2013&ndash;2019 time period, we provide insight regarding characteristics of homeowners who chose the maximum deductible as well as those who switched from the $5,000 to the new $10,000 deductible. Consistent with nudge theory and stickiness, we show that the majority of the homeowners accept the default deductible option. Individuals in high-income and high-premium areas were more likely to select the maximum dedu&ZeroWidthSpace;ctible. Level of education and past flood events do not impact whether people decide to select the maximum deductible option. </span></div>
Original languageAmerican English
JournalJournal of Housing Research
Volume29
DOIs
StatePublished - 2020

Keywords

  • FEMA
  • National Flood Insurance Program
  • flood hazard
  • flood insurance
  • insurance gap
  • natural disasters

Disciplines

  • Business
  • Insurance

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