Moral Hazard and The National Flood Insurance Program

Description: The number of National Flood Insurance Program (NFIP) policies in force, the number of claims the program pays, and the value of these claims are associated with properties located in a floodplain. If the insurance program is structured so that the availably of insurance encourages people to live in dangerous flood prone areas they are incentivizing risky behavior and thus there is moral hazard present. The Flood Insurance Reform Acts of 1994 and 2004 were enacted to reduce damages caused by flood events. In this paper I find evidence to suggest that the Reform Act of 1994 was associated with an increase in the number of claims paid by the NFIP, not reducing the moral hazard problem. The 2004 Act was successful in reducing the value of claims paid by the NFIP and the number of policies in force, reducing the moral hazard present. Additionally, the Reform Act of 2004 authorized two grant programs that were not funded until 2006. These grant programs are associated with a decrease in the number of NFIP policies in force, further reducing the moral hazard problem.