Expanding the National Flood Insurance Program to Cover Coastal Erosion Damage
Keeler, Andrew, Kriesel, Warren, Landry, Craig, Journal of Agricultural and Applied Economics
This paper uses the results of a nationwide survey of coastal property owners to estimate the demand for insurance against erosion damage. The National Flood Insurance Program (NFIP) does not technically cover such damage, although in practice there is considerable uncertainty about this point. The ability to insure against such losses has implications for the choice of beach management strategies and for NFIP management. We find significant demand for insurance at prices in the range of current flood insurance premiums, although median willingness to pay appears to be less than the cost of providing such insurance.
Key Words: coastal erosion, insurance, risk
JEL Classifications: Q24, G22, H41
Real estate development in the coastal areas of the United States has intensified over the past several decades (Pilkey and Dixon). Coastal areas tend to be unstable, and most coastlines erode shoreward over time; the eastern U.S. loses 2 to 3 ft./y to erosion, whereas the national average is about 1 ft. (Leatherman). The combination of these two facts has made coastal erosion management an important concern for all levels of government. A central question is the role played by insurance, relative to other prevention and mitigation tools, in managing the risks to real property that coastal erosion presents. There is currently no insurance generally available that covers losses to homes caused by coastal erosion.
The National Flood Insurance Program (NFIP) provides the overwhelming majority of flood insurance policies in the United States. The NFIP is intended to cover damages from a "general condition of flooding" (i.e., rising water levels), and not from erosion damage associated with changes in the location of the coastline. However, current NFIP policies have produced an ambiguous outcome for properties along erosion-prone coasts, where reduced setback distance has undermined buildings and made them susceptible to damage. If houses suffer damage from erosion during a flood-causing storm, the claim will likely but not certainly be paid. However, if erosion-induced undermining and damage takes place during a time when there is no widespread flooding, then the damage claim will be denied. This latter condition has become known as "sunny day loss."
The uncertainty surrounding erosion damage and the NFIP creates two questionable outcomes. First, property owners have an incentive to stave off erosional undermining until the next storm event, at which time losses become flood-related and are likely to be covered under their flood insurance policy. The NFIP requires that collected premiums cover overall operating expenses and indemnities for an average loss year, and the risk of erosion damage is not figured into the premium structure. Therefore, if some share of erosion-related claims are paid, either these property owners' premiums are being subsidized by others in the program, or the premiums collected will tend to be too low.
A second problem has to do with the incentives for investing in engineering projects that mitigate the risk of erosion damage. These investments may be financial, in the case of structures built by individuals, or political, in terms of effort and resources expended to secure publicly funded erosion management projects. If homeowners do not have insurance available, they may overinvest in engineering solutions.
The amount of investment in shoreline engineering has important implications for the amenity value conferred by beaches to the very large population of recreational beach users. Coastal property owners have constructed sea walls, groins, and other devices to protect their property, and they also provide political support for public efforts to build and maintain shoreline engineering structures. There is substantial evidence that sea walls degrade attractive recreational beach qualities (Pilkey and Dixon; Dean). Furthermore, beach quality has significant impacts on property prices for a considerable distance from the beach, so these negative externalities affect property owners as well as recreational beach users (Milon, Gressel, and Mulkey). …