Do Perverse Insurance Incentives Encourage Coastal Vulnerability?

Abstract

Subsidized insurance is often described as a perverse incentive, moral hazard, or maladaptation that perpetuates coastal residencies in vulnerable homes despite increasing safety and economic risks from hurricanes, sea level rise, and other climate change impacts. Insurance is also often described as a positive factor in coastal risk reduction if insurers proactively reward homeowners for upgrades that mitigate losses from hurricanes. The empirical and policy-relevant question remains whether homeowners perceive insurance incentives as perverse or positive. A new survey of 662 North Carolina coastal homeowners shows that most are failing to upgrade their homes to address hurricane risk or plan for coastal retreat but not because they expect insurance to cover losses. Rather those aware of insurance incentives are more likely to live in better-protected residences and take the incentivized actions. Limited awareness of existing policies suggests a need for greater outreach by policymakers, lenders, and insurers.