Understanding the Demand for Flood Insurance

In this paper, I examine the demand for flood insurance using data from every flood insurance policy-in-force in St. Louis County, Missouri, for the years 2000–2006. The contract choices of policyholders are examined, as are the determinants of take-up rates and coverage levels at the census tract level. Take-up rates are very low, with policy retention not as large a problem as writing policies initially. Risk drives demand but not always as predicted. Take-up rates increase with more land in 100-year floodplains and surprisingly, with more land in 500-year floodplains. Just less than one-third of all policies-in-force are outside 100-year floodplains. Take-up rates decline with levee protection and unexpectedly, along major rivers. Outside 100-year floodplains, where the mandatory purchase requirement does not apply, homeowners choose lower deductibles and more comprehensive coverage. The amount of coverage purchased increases with the value of a home, median income, and along major rivers.