Why people don't buy flood insurance

Floods are the most common disasters. The damage they cause can be devastating and costly. Yet many people fail to do anything to protect themselves. The reasons why are the subject of a new study by the Wharton School, a member of Zurich flood resilience alliance.

"While there is general agreement that investing in pre-disaster protection is more effective than waiting for ad hoc post-catastrophe response, there is growing evidence that many people often do not voluntarily invest in loss reduction measures. This holds true for both physical protection and flood insurance", according to Wharton.

Breaking new ground, Wharton looked not only at people’s attitudes toward flood risk, but also how government disaster aid affects demand for private insurance. While the availability of government relief doesn’t appear to stop people from buying insurance, the amount of aid, if it is very high, it could lead people to think they have nothing to lose by not protecting themselves, and encourage them to take more risks.

People also seem to have a false sense of security. They often overestimate the likelihood of a flood, but underestimate the losses they will face if a flood affects them.

Wharton found that 80 percent of residents in the areas of New York affected by Superstorm Sandy had no flood insurance, and a staggering 90 percent of small businesses had no such protection, even though government subsidies for such insurance were available. Nor is the lack of protection confined to the U.S. In Germany, catastrophic floods in 2002 also revealed that many people were inadequately protected.

One way to encourage people to better protect themselves from flood risk would be to educate them about the costs if they don’t have insurance and take measures to protect their property: In the U.S., for homes affected by floods, the average building claim is almost 25 percent of the total value. For the years 1980 to 2012, the study found a mean claim payment for combined building and contents for single-family homes affected by floods in the U.S. to be more than USD 34,000.

Governments and officials can encourage people to reduce risks, for example, by providing flood maps that clearly distinguish between sites that are ‘high’ or ‘low’ risk, by enforcing building codes, and taking into account how disaster relief affects long-term resilience.

The study, "Why many individuals still lack flood protection", by the Center for Risk Management and Decision Processes at the Wharton School of the University of Pennsylvania:

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