NFIP - Tejesh Pradhan

The Role of National Flood Insurance Program in Social Protection

From both humanitarian and public policy perspectives, mitigating the socioeconomic consequences of natural disasters is critical to protect people from sliding into poverty. The National Flood Insurance Program (NFIP) in the US is implemented to enforce floodplain management regulations and to provide insurance protection against flood damages. Using a recently published NFIP claims data set, this project estimates the extent to which NFIP protects insurees from poor, flood-prone counties.

Understanding where NFIP is most effective and why can inform future program expansion and identifying underserved areas can strengthen business strategies of partnering private insurance companies. Quantifying vulnerability to flood damages can also help capital markets preempt the spillover of flood risks to the US housing and financial sectors.

The chart on the left suggests that counties in the bottom tercile (or below the 33rdpercentile) of the income per capita distribution (shaded in light blue) have the smallest share of insurance spending in high flood risk areas.

Likewise, the chart on the right shows that claims from NFIP is relatively lower for high risk counties, on average. Furthermore, low income counties in high risk areas get the smallest share of claims.

The time trends below shows how mean NFIP claims to insurance changed throughout the years of the program in high and low risk areas.

Visualizing the spatial distribution of income, flood insurance spending and flood risks gives us a better picture of which counties are protected and which need more protection.

The colors in the map on the top show combination of terciles of income per capita and mean spending on flood insurance. Counties shaded black are those that lie in the bottom tercile of both income per capita and flood insurance spending.

Similarly, colors in the map on the bottom show combination of terciles of income per capita and category of flood risks. Counties shaded black are those that lie in the bottom tercile of NFIP insurance spending and are highly vulnerable to flood.

The necessity and/or opportunity for expansion of the flood insurance program is in counties at the intersection of the two.

Preliminary graphical analysis shows that the mean claims to insurance ratio is the highest for low-income counties with moderate risk of flooding but is the lowest for low-income counties with high risk of flooding.

Based on this, I hypothesize that support from NFIP insurance has not effectively reached the poorest counties in flood-prone areas.

To test this intuition more rigorously, I use linear regression to model claims to insurance ratio as a function of categories of flood risk, mean county income, interaction between the two, characteristics pertinent to each insurance claim, binary indicators for each county, binary indicators for years, and county-specific linear time-trend.

The main insights from the regression analysis are as follows:

1. Claims to insurance is 4.42 percentage points higher for counties in high risk areas, on average.

2. When accounting for cross-county differences in income per capita, claims to insurance is 4.63 percentage points higher for counties in high risk areas.

3. A one percent increase in income per capita is associated with a 0.57 (0.59) percentage points decline in claims to insurance ratio in low (high) risk areas.

The following tool visualizes predicted claims to insurance numbers over time for high and low risk areas across US states, using the estimates from the interaction model above.

Conditioned on the factors included in the interaction model, the choropleth below depicts the combination of flood risk and tercile of mean predicted claims to insurance ratio across counties in the United States.