Capitalization of Flood Insurance and Risk Perceptions in Housing Prices: An Empirical Agent‐Based Model Approach

Abstract

Federally regulated or insured lenders in the United States are mandated to require flood insurance on properties that are located in areas at high risk of flooding. Despite the existence of this mandatory flood insurance requirement, take‐up rates for flood insurance have been low, and the federal government's exposure to uninsured property losses from flooding remains substantial. Meanwhile, the value of capital at risk varies significantly with flood events and changing risk perceptions, which necessitates mechanisms that stabilize these dynamics. In this article we discuss how a scenario of complete insurance uptake, under various risk attitudes, affects the value of properties in the 100‐year and 500‐year flood zones. Our results indicate that an increase in flood insurance uptake may provide such a mechanism by lowering the value of capital at risk in the flood zone consistently, independent of homeowners' risk attitudes. We apply an empirical adaptive agent‐based model to examine the capitalization of insurance costs, risk premiums, and their interaction in housing prices. Our approach combines widely‐used empirical hedonic analysis with the computational economic framework. We highlight the usefulness of our method in capturing the marginal implicit price of homeowners' preferences that may change over time and separately assess the effect of various factors and policies on property values, illustrating the agent‐based modeling as a valuable complement to traditional hedonic analysis.

Tracing resilience, social dynamics and behavioral change: a review of agent-based flood risk models

“…The most common option within the SH group is to employ empirical water-depth damage functions, often for specific building (Dubbelboer et al, 2017;Haer et al, 2020;Han & Peng, 2019). The MR ABMs treat vulnerability simplistically, for example, calculating damages as a fixed percent of property value averaged for the whole floodplain (de Koning et al, 2017Koning et al, , 2019. Moreover, in flood-ABMs, agents can decrease their vulnerability, undertaking structural CCA actions such as elevating a house or installing flood barriers, which is the focus in the SH literature (17:18 papers) (see 3.2.2, Table 2).…”

“…Real estate is a common actor in MR flood-ABMs (Chandra-Putra & Andrews, 2019; de Koning et al, 2017Koning et al, , 2019 de Koning & Filatova, 2020;Filatova, 2015). The Real estate agent observes successful trades and identifies changes in market conditions, learning from hundreds of recent sales in the simulated decentralized housing market.…”

Apólice de seguro contra cheias para a sustentabilidade dos investimentos

“…Parte-se da premissa que o capital em perigo varia com a frequência das cheias, exigindo mecanismos económicos que estabilizem os factos ligados à dinâmica dos eventos (Koning et al, 2019). Tendo em conta a cada vez maior frequência das cheias, devido às alterações climáticas e suas consequências, bem como aos erros de ordenamento do território, propõe-se rever o valor da apólice e os fatores de risco a contemplar (Pralle, 2019).…”

“…Para que o seguro cumpra essas funções com sucesso, o preço da política e as opções da apólice devem ser baseadas em informações precisas das evidências (Rumson & Hallett, 2019). Ao existirem dados sobre o histórico das ocorrências de cheias, isso permite que as seguradoras reavaliem as classificações do processo perigoso (Koning et al, 2019;Rumson & Hallett, 2019;Zêzere et al, 2014). As fontes da imprensa periódica (IP) são vistas como essenciais para as seguradoras reavaliarem a apólice do seguro (Grosso, Dias, Costa, Santos, & Garrett, 2015) por conterem os dados sobre as consequências.…”

“…O aumento na adesão ao seguro contra cheias diminui o valor do capital em perigo, nomeadamente das propriedades, empreendimentos e imóveis (Koning, Filatova, & Bin 2019). Com isso concede-se segurança para a economia e para a vida das pessoas, por equilibrar o risco financeiro (Ghorbani & Farzai, 2018).…”