RAND Study Says Few Homeowners Buy Flood Insurance When It Is Not Required

For Release

March 13, 2006

Only about half of homeowners living in some of the most flood-prone areas of the United States buy federal flood insurance, leaving millions of families at risk for severe financial losses when floods strike, according to a RAND Corporation study issued today.

Most homeowners buying flood insurance do so only because it is required in areas considered most vulnerable to flooding, the study found. Just 20 percent of homeowners living in the most flood-prone areas buy federal flood insurance when they are not required to do so, the study says.

“Substantial flood damage from Hurricane Katrina was suffered by homes located in flood zones whose owners were not required to purchase flood insurance,” said Lloyd Dixon, lead author of the report.

Only about 1 percent of Americans living outside flood zones buy federal flood insurance, according to the study, even though they sometimes become flood victims as well.

Fifty to 60 percent of the 3.6 million single-family homes in the most flood-prone areas are required by law to buy federal flood insurance. But the owners of the remaining homes in the most flood-prone areas and the roughly 76 million single-family homes in the nation outside these areas are not required to buy flood insurance.

The National Flood Insurance Program, established by Congress in 1968, makes flood insurance available in communities that adopt floodplain management programs. Requirements to purchase flood insurance were first adopted in 1973, in response to very low participation in the program in its initial years.

Under the law, most homes with mortgages located in designated Special Flood Hazard Areas must purchase flood insurance. Special Flood Hazard Areas are designated by the Federal Emergency Management Agency (FEMA) as having at least a 1 percent chance of experiencing flooding in any given year.

The study is part of a wide-ranging evaluation of the nation's flood insurance system that was requested by the FEMA and coordinated by American Institutes for Research (AIR). AIR is an independent, nonpartisan not-for-profit organization that conducts behavioral and social science research on important social issues and delivers technical assistance both domestically and internationally in the areas of health, education, and workforce productivity. "The findings represent important new information that contributes to the larger effort to improve the flood insurance program," said Marc Shapiro, AIR's director of the evaluation project. Additional studies and the final AIR report will be released later this year.

The RAND study also found little evidence to suggest that increasing the number of homeowners who buy flood insurance would lower FEMA disaster assistance to individuals following floods. The lack of relationship is partly because flood insurance does not cover temporary housing assistance, which accounts for roughly 60 percent of FEMA individual assistance following flooding disasters. The FEMA individual disaster assistance program is one of many forms of federal disaster assistance available to individuals, businesses, and governments following floods.

Extending the National Flood Insurance Program to include temporary housing could help reduce FEMA individual disaster assistance payments, according to the report, although such a policy change would require a broader examination of potential impacts.

The RAND study also explores the number, location and characteristics of homeowners who purchase federal flood insurance. In addition, it outlines what motivates people to buy insurance and assesses the implications of increasing sales of flood insurance.

The analysis provides a solid basis for policymakers to determine the National Flood Insurance Program’s impact, assess costs and benefits, and evaluate proposed reforms, Dixon said. For example, the findings provide the data needed to better estimate the effects of recent proposals to extend the mandatory purchase requirement to all homes in Special Flood Hazard Areas.

The study is based on a more reliable method for estimating participation in the federal flood insurance program than has been used on broad scale previously. A random sample of single-family homes was selected from the property tax rolls of 100 communities across the country. The National Flood Insurance Program policy-in-force database was then used to determine which homes had flood insurance policies. The study demonstrated the feasibility and power of this approach, and the authors recommend that it be extended to a larger sample of communities to increase the detail and precision of the estimates.

The RAND study also found that:

  • Flood insurance purchase rates are much lower in communities that have a relatively small number of homes in a floodplain or that have a low proportion of homes in a floodplain. The disparity may be because insurers market flood insurance less aggressively in communities with fewer homes in the floodplain or because there are fewer insurance agents familiar with the program and enthusiastic about writing policies in such communities.
  • In communities subject to coastal flooding, about 63 percent of homeowners purchase flood insurance, compared with 35 percent of homeowners in areas subject only to river flooding. The disparity may be due to a lower perception of risk or the limited insurance coverage available for basements, which are more common in inland areas. The RAND report recommends policymakers examine these and other reasons why the flood insurance is less attractive in inland areas.
  • Within Special Flood Hazard Areas nationwide, about 75 to 80 percent of those who are required to purchase flood insurance have done so.
  • Communities with lightly populated flood zones or a small percentage of homes in flood zones present a growth opportunity for the National Flood Insurance Program. However, developing strategies to increase participation in the insurance program across the large number of such communities (roughly 19,000 of the approximately 20,000 communities participating in the National Flood Insurance Program) will be challenging.
  • Overall market penetration for flood insurance in Special Flood Hazard Areas is approximately 60 percent in the South and West regions of the United States, compared with 20 to 30 percent in the Northeast and Midwest.
  • In the South, 75 percent of homes with flood insurance policies also have contents coverage, compared with 16 percent in the Midwest and 49 percent in the Northeast.
  • Nearly 60 percent of single-family homes in Special Flood Hazard Areas nationwide are in the South, although less than 25 percent of the nation’s single-family homes are in the South.

The study also found that that the decision to purchase flood insurance is not particularly sensitive to the price of flood insurance, at least over the range of flood insurance prices currently observed. Consequently, the study concludes that when developing strategies to increase participation in the flood insurance program, program managers do not have to be greatly concerned about moderate changes in policy premiums.

The other authors of the report are Noreen Clancy, Seth Seabury, and Adrian Overton of RAND.

The study was conducted jointly by the Institute for Civil Justice and the RAND Infrastructure, Safety and Environment division.

The RAND Institute for Civil Justice helps make the civil justice system more efficient and equitable by supplying government leaders, private decision-makers and the public with the results of objective, empirically based, analytic research.

The RAND Infrastructure, Safety and Environment division's mission is to improve development, operation, use and protection of society's essential built and natural assets; and to enhance the related social assets of safety and security of individuals in transit and in their workplaces and communities.

The National Flood Insurance Program's Market Penetration Rate: Estimates and Policy Implications” (ISBN: 0-8330-3908-3) be downloaded from the RAND Web site or from FEMA's NFIP evaluation Web site.

About the RAND Corporation

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