The Affordability Goal and Prices in the National Flood Insurance Program

Abstract

The United States Gulf Region features areas that face significant flood risk. Climate change may further elevate this risk. Home owners in such areas face potentially large asset losses and property maintenance costs. Anticipating these challenges, the Federal government has enacted a complex set of policies through its National Flood Insurance Program (NFIP). The NFIP offers reduced insurance rates for homes built before rate maps were drawn and grandfathers rates for homes when new maps increase their risk ratings. This paper asks if the goal of affordable NFIP insurance rates for the high risk Gulf Coast areas is warranted? We compare the income distribution of the set of people who live in the areas that face the highest risk of flooding relative to nearby areas. Our findings imply reduced rates for high risk areas cannot be justified based on the assumption that low income households live in these areas.

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