Improving the National Flood Insurance Program

Abstract

This paper highlights factors that need to be considered for improving the National Flood Insurance Program in the USA to address the biases that lead individuals to not protect themselves against low-probability, high-consequence flood events. The errors that individuals exhibit in deciding not to purchase insurance or invest in loss reduction measures prior to a disaster can be traced to the effects of six biases: myopia, amnesia, optimism, inertia, simplification and herding. Along with two guiding principles for insurance, a behavioral risk audit can assist in designing a strategy using concepts from choice architecture coupled with economic incentives to encourage property owners in hazard-prone areas to purchase insurance and invest in cost-effective adaptation measures to protect themselves against future disaster losses.