Climate Risk Perceptions and Demand for Flood Insurance
Climate Risk Perceptions and Demand for Flood Insurance Abstract We study how individuals' beliefs about climate change influence their adaptation behavior through the choice and level of flood insurance coverage. Using the heteroge- neous impact of widening partisan polarization on climate change beliefs and exogenous flood insurance premium increases, we show that when more people are worried about global warming, higher the demand for flood insurance in areas where flood insurance is not mandatory. In areas where flood insurance is mandatory, higher the fraction of population who is worried about global warming, higher the propensity to carry volun- tary contents coverage, and lower the likelihood of choosing the maximum deductible amount. JEL Classification: D14, D81, D83, G11, G41 Keywords: global warming, adaptation, flood insurance, perceptions 1. Introduction Flooding is the costliest natural disaster in the United States and the current estimates from the Federal Emergency Management Agency (FEMA) significantly underrepresent the 41 million households exposed to 1 in 100 year flood events (Wing et al., 2018; First Street Foundation, 2020).1 Global warming can potentially increase future flood risks and lead to substantial economic losses (Solomon et al., 2007; Mousavi et al., 2011; Smith, 2020). Flood insurance is a form of effective adaptation measure that helps property owners minimize their losses and recover quickly (Billings et al., 2019), and a simple expected utility analysis shows that purchasing flood insurance is a rational and net positive benefit decision for people at most wealth levels. Despite the potential benefits, subsidized flood insurance premiums, and increasing flood risks, flood insurance take-up rate is less than 5% in areas where flood insurance is not mandated by federal law.2 At a time when the frequency and severity of floods are increasing in-part due to global warming (EASAC, 2018; Smith, 2020), homeowners who are not worried about global warm- ing may assign a lower probability of flood damage to their homes.
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