Moral hazard: how the national flood insurance program is limiting risk reduction

Abstract

Moral hazard occurs when people do not assume the full risk of an action or decision; they are not inclined to make a fully responsible or moral choice. Over the course of the last half-century, federal government involvement in providing disaster assistance has greatly expanded. With this expansion, many believe that in providing disaster assistance, the federal involvement limits risk reduction and contributes to the rise of a moral hazard. Flooding and flood-related hazards are the most prominent and significant hazards in the United States, accounting for the highest percentage of major disaster declarations and direct economic losses. The National Flood Insurance Program (NFIP) aims to reduce the impact of flooding through hazard identification and risk assessment, floodplain management, and flood insurance. A study of the NFIP concludes that aspects of the program limit risk reduction, specifically the continued coverage of repetitive loss properties and use of subsidies to desensitize risk. Furthermore, the long-term sustainment and resilience of the program are compromised by failures of policymakers to adjust for catastrophic losses. Identification of these issues provides a framework for consideration of the unintended consequences of federal government involvement in providing disaster assistance.