Moral Hazard and the NFIP’s Efforts to Reduce Repetitive Loss Property Claims

The continued coverage of repetitive loss properties by the National Flood Insurance Program (NFIP) is indicative of moral hazard presence, since the program is incentivizing the risky behavior of living in a dangerous floodplain. If additional implemented policy changes the behavior of the policyholder in such a way that results in increased costs for the NFIP, the moral hazard issue is further exacerbated. The centerpiece of the Flood Insurance Reform Act of 2004 was the installation of the Repetitive Flood Claims and Severe Repetitive Loss Programs which aimed at eliminating repetitive loss properties and their associated claim value. In this paper, I find evidence to suggest that additional funds paid to a state from these grant programs in a year are associated with an increase in the value of repetitive loss property claims in that state the following year; this suggests that this policy accentuated the issue of moral hazard and limited risk reduction in the short run, while its purpose was to do the opposite.