# RECORD 3f462deaffad7fe742db08cf3bb6e2c5576862af
# TITLE: Capitalization of Flood Insurance and Risk Perceptions in Housing Prices: An Empirical Agent‐Based Model Approach
# YEAR: 2019.0  VENUE: Southern Economic Journal  DOI: 10.1002/soej.12328
# AUTHORS: Koen Koning; T. Filatova; Okmyung Bin
# PAGES: 21  CANDIDATE TABLE PAGES (1-based): []
# 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.


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Symposium: Economics, Insurance, and Flood Hazards
Capitalization of Flood Insurance and Risk
Perceptions in Housing Prices: An Empirical
Agent-Based Model Approach
Koen de Koning,* Tatiana Filatova,† and Okmyung Bin‡
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 mecha-
nisms 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 atti-
tudes. 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 sepa-
rately assess the effect of various factors and policies on property values, illustrating the agent-based
modeling as a valuable complement to traditional hedonic analysis.
JEL Classification: C53, G22, Q54, R21
1. Introduction
Flooding is the most frequent and costly natural disaster in the world. In the United States, the
National Flood Insurance Program (NFIP) aims to redistribute risks and provide immediate relief
funds to meet the escalating costs of floods. The success of the NFIP may depend on appropriate
pricing and making the flood insurance widely available to homeowners at risk. Certain property
owners in Special Flood Hazard Areas (SFHAs) in the communities that participate in the NFIP are
required to purchase and retain flood insurance for the duration of their mortgage loans. Yet,
despite the existence of this mandatory purchase requirement, take-up rates for flood insurance have
been low (Browne and Hoyt 2000; Kriesel and Landry 2004; Michel-Kerjan and Kousky 2010),
reaching only 49% of single-family homes in the designated zones nationwide (Dixon et al. 2006).
A concern on the low take-up rates has been often expressed following major flood events.
* Department of Governance and Technology for Sustainability, University of Twente, P.O. Box 217 7500AE,
Enschede, The Netherlands; E-mail: k.dekoning@utwente.nl.
† Department of Governance and Technology for Sustainability, University of Twente, P.O. Box 217 7500AE,
Enschede, The Netherlands; E-mail: T.Filatova@utwente.nl.
‡ Department of Economics, East Carolina University, Greenville, NC 27858, USA; E-mail: bino@ecu.edu;
corresponding author.
Southern Economic Journal 2019
DOI: 10.1002/soej.12328
© 2019 by the Southern Economic Association
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