Catastrophe risks: the US National Flood Insurance Program

An interesting analysis of the US National Flood Insurance Program by Erwann Michel-Kerjan appeared in this Fall’s issue of the Journal of Economic Perspectives. One key issue in evaluating the program and its payouts versus premiums is assessing the probability of extreme events–always an issue in catastrophe insurance. Another key issue is incentives to game the program rules, something that also arises persistently in legislatively mandated insurance. In this case it is the use of outdated maps. And, the well known issue of reduced incentives to take actions to minimize the risk of loss. In the conclusion, the author points out that several other countries use private insurance markets for the same risks.

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