Flood risk, homeowners' flood risk perception and insurance

Abstract

This dissertation analyzes the perception of flood risk as captured in property prices and in the decision of buying flood insurance. First, we examine whether property price differentials reflecting flood risk increase following a large flood event, and whether this change is temporary or permanent. We use single family residential property sales in Dougherty County, Georgia, between 1985 and 2004 in a difference-in-differences spatial hedonic model framework. After the 1994 “flood of the century,” prices of properties in the 100-year floodplain fell significantly. This effect was, however, short-lived. In spatial hedonic models that explicitly incorporate both linear and non-linear temporal flood-zone effects, we show that the flood risk discount disappeared between four to nine years after the flood depending upon the specification. Second, in addition to knowing whether a property lies in the floodplain, we use a unique dataset with the actual inundation maps for the city of Albany, GA, to estimate the changes in implicit flood risk premium following the 1994 flood in Georgia. We find that the discount for properties in the inundated area is substantially larger than in comparable properties in the floodplain areas that did not get inundated. This suggests that, in addition to capturing an information effect, the larger discount in inundated properties reflects potential uninsurable flood damages, and supports a hypothesis that homeowners respond better to what they have visualized (“seeing is believing”). Third, we determine the market penetration rate for flood insurance in Georgia. Additionally, we estimate a fixed effects model pooling the data from 1978 to 2010 across 153 counties in Georgia to identify the determinants that influence the decision to buy flood insurance at the county level. The empirical analysis supports the hypothesis that income and price significantly influence the decision to buy the flood insurance. Our findings also suggest that recent flood events and the proportion of the county in the floodplain have a significant positive impact on the decision to buy flood insurance. Education level, race and age also have a significant impact on the decision to buy flood insurance.