Closing the flood insurance protection gap: Evidence from mandated pooling in France
Abstract
Mandating flood insurance at subsidized prices is increasingly advocated as a solution to the persistent and growing flood insurance protection gap, yet its effectiveness relative to existing schemes remains underexplored. This paper provides the first empirical evaluation of such a policy on construction, and compares it with alternative systems. I study the case of France where flood insurance is mandatory and premiums are independent of exposure to risk. Using fine-grained dwelling-level data from France and Belgium, used as a control group, I estimate the impact of mandated insurance pooling on construction. I find large behavioral responses, but a relatively small effect of 3% on total flooding costs between 1981 and 2020. I then simulate the implementation of mandatory insurance with risk-reflective pricing, which raises dramatically living costs in floodplains. Trading-off between redistributive preferences and housing supply responses, I determine the optimal level of risk-pricing using a location choice model combined with a social insurance framework. Finally, augmenting the model with an insurance demand component, I compare the welfare effects of three policy scenarios: no government intervention, partial risk-sharing (similar to the US system), and an insurance mandate with optimal transfers. This study offers policy-makers new empirical evidence and counterfactual policy options for improving flood insurance coverage.
