With legislation funding the National Flood Insurance Program (NFIP) four months away from expiring all sides are jockeying for a better political position during its renewal. Key to the debate will be the issue of affordability and how to increase premiums to stabilize the debt-ridden program.
New research argues that the answer may be simple: charge the rich more. A lot more.
According to the research, the wealthier you are (measured by home value or income) the less you care about the cost of your flood insurance premiums and deductibles. Even more surprisingly, as flood insurance costs increased so did the wealthy's willingness to pay for coverage.
The research, released by the Washington think tank Resources for the Future, came to conclusion by studying deductible choices of over 100,000 residential policyholders in areas designated as high risk by the Federal Emergency Management Agency, mapped 100-year floodplain and designated Special Flood Hazard Area (SFHA).
In economist speak, that mean flood insurance is a "normal good" , which means it sees an increase in demand as the buyers income increases and that flood insurance should be means tested.
Our findings suggest that the benefits of means-tested subsidies for insurance are twofold: (1) they reduce the burden of premiums on low income households and (2) they preserve coverage among the group of homeowners that is both the most in need of insurance and, paradoxically, the most willing to forego it when costs are too high.
RMN subscriber stories this week:
Insurers Should Focus On Range of Climate Scenarios With New Model: RMS
Oscar Is Cutting Buffett Reinsurance Spend
$35B Catastrophe Would Be a “Tipping Point” for Canadian Insurers
A Quick Primer on Double Yolk Eggs and Underwriting
Hedge fund manager Patrick Boyle of Palomar Capital Management continued his series on modern finance concepts with a focus on probability and how it connects to finance and insurance underwriting. Worth a listen.
Defi Insurance
Decentralized finance (DeFi) is driving much of the interest and volatility in cryptocurrencies over the past year and now, like the Eye of Sauron, crypto is turning its attention to insurance and risk underwriting.
Coinbase, one of the largest exchanges, gave its rundown on DeFi insurance in very good explainer this week.
The fundamental challenges around pricing insurance coverage, competing with DeFi yields, and assessing claims, in combination with limited capital efficiency, has kept insurance from gaining meaningful traction to date.
These challenges collectively result in the largest bottleneck: capturing enough underwriting capital to meet demand. With $50B deployed in DeFi, we clearly need both a lot of capital and capital efficient markets. How do we solve this?
