Does federal disaster assistance crowd out flood insurance?

Carolyn Kousky, Erwann O. Michel-Kerjan, Paul A. Raschky

Research output: Contribution to journalArticle

Abstract

We empirically analyze whether federal disaster aid crowds out household purchase of disaster insurance. We combine data on annual household flood insurance purchases for the United States over the period 2000-2011 with data from the two main U.S. post-disaster federal aid programs (FEMA's Individual Assistance grants and SBA's low interest disaster loans). Estimating both fixed-effects and instrumental variable models to account for the endogeneity of disaster assistance grants, we find that receiving individual assistance grants decreases the average quantity of insurance purchased the following year by between $4000 and $5000. The reduction we find is roughly 3% of the mean insurance coverage in the sample but larger than the average flood-related IA grant in our sample, which is $2984. IA is currently limited and larger grants could have different impacts. The crowding out is on the intensive margin; we find no impact on take-up rates, likely because there is a requirement that recipients of disaster aid purchase an insurance policy. We do not know how take-up rates might change without such a requirement. Low interest post-disaster government loans have no systematic effect on insurance purchases.

LanguageEnglish
Pages150-164
Number of pages15
JournalJournal of Environmental Economics and Management
Volume87
DOIs
StatePublished - Jan 2018

Keywords

  • Disaster relief
  • Flood insurance
  • Natural disasters and extreme events

Cite this

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title = "Does federal disaster assistance crowd out flood insurance?",
abstract = "We empirically analyze whether federal disaster aid crowds out household purchase of disaster insurance. We combine data on annual household flood insurance purchases for the United States over the period 2000-2011 with data from the two main U.S. post-disaster federal aid programs (FEMA's Individual Assistance grants and SBA's low interest disaster loans). Estimating both fixed-effects and instrumental variable models to account for the endogeneity of disaster assistance grants, we find that receiving individual assistance grants decreases the average quantity of insurance purchased the following year by between $4000 and $5000. The reduction we find is roughly 3{\%} of the mean insurance coverage in the sample but larger than the average flood-related IA grant in our sample, which is $2984. IA is currently limited and larger grants could have different impacts. The crowding out is on the intensive margin; we find no impact on take-up rates, likely because there is a requirement that recipients of disaster aid purchase an insurance policy. We do not know how take-up rates might change without such a requirement. Low interest post-disaster government loans have no systematic effect on insurance purchases.",
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Does federal disaster assistance crowd out flood insurance? / Kousky, Carolyn; Michel-Kerjan, Erwann O.; Raschky, Paul A.

In: Journal of Environmental Economics and Management, Vol. 87, 01.2018, p. 150-164.

Research output: Contribution to journalArticle

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