1# RECORD 3f462deaffad7fe742db08cf3bb6e2c5576862af2# TITLE: Capitalization of Flood Insurance and Risk Perceptions in Housing Prices: An Empirical Agent‐Based Model Approach3# YEAR: 2019.0 VENUE: Southern Economic Journal DOI: 10.1002/soej.123284# AUTHORS: Koen Koning; T. Filatova; Okmyung Bin5# PAGES: 21 CANDIDATE TABLE PAGES (1-based): []6# 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.789===== PAGE 1 (score 4, numeric-paren 0, table-words 0, var-words 4) =====1011Symposium: Economics, Insurance, and Flood Hazards12Capitalization of Flood Insurance and Risk13Perceptions in Housing Prices: An Empirical14Agent-Based Model Approach15Koen de Koning,* Tatiana Filatova,† and Okmyung Bin‡16Federally regulated or insured lenders in the United States are mandated to require flood insurance on17properties that are located in areas at high risk of flooding. Despite the existence of this mandatory flood18insurance requirement, take-up rates for flood insurance have been low, and the federal government’s19exposure to uninsured property losses from flooding remains substantial. Meanwhile, the value of capital20at risk varies significantly with flood events and changing risk perceptions, which necessitates mecha-21nisms that stabilize these dynamics. In this article we discuss how a scenario of complete insurance22uptake, under various risk attitudes, affects the value of properties in the 100-year and 500-year flood23zones. Our results indicate that an increase in flood insurance uptake may provide such a mechanism by24lowering the value of capital at risk in the flood zone consistently, independent of homeowners’ risk atti-25tudes. We apply an empirical adaptive agent-based model to examine the capitalization of insurance costs,26risk premiums, and their interaction in housing prices. Our approach combines widely-used empirical27hedonic analysis with the computational economic framework. We highlight the usefulness of our method28in capturing the marginal implicit price of homeowners’ preferences that may change over time and sepa-29rately assess the effect of various factors and policies on property values, illustrating the agent-based30modeling as a valuable complement to traditional hedonic analysis.31JEL Classification: C53, G22, Q54, R21321. Introduction33Flooding is the most frequent and costly natural disaster in the world. In the United States, the34National Flood Insurance Program (NFIP) aims to redistribute risks and provide immediate relief35funds to meet the escalating costs of floods. The success of the NFIP may depend on appropriate36pricing and making the flood insurance widely available to homeowners at risk. Certain property37owners in Special Flood Hazard Areas (SFHAs) in the communities that participate in the NFIP are38required to purchase and retain flood insurance for the duration of their mortgage loans. Yet,39despite the existence of this mandatory purchase requirement, take-up rates for flood insurance have40been low (Browne and Hoyt 2000; Kriesel and Landry 2004; Michel-Kerjan and Kousky 2010),41reaching only 49% of single-family homes in the designated zones nationwide (Dixon et al. 2006).42A concern on the low take-up rates has been often expressed following major flood events.43* Department of Governance and Technology for Sustainability, University of Twente, P.O. Box 217 7500AE,44Enschede, The Netherlands; E-mail: k.dekoning@utwente.nl.45† Department of Governance and Technology for Sustainability, University of Twente, P.O. Box 217 7500AE,46Enschede, The Netherlands; E-mail: T.Filatova@utwente.nl.47‡ Department of Economics, East Carolina University, Greenville, NC 27858, USA; E-mail: bino@ecu.edu;48corresponding author.49Southern Economic Journal 201950DOI: 10.1002/soej.1232851© 2019 by the Southern Economic Association52153