Perilous property: A study of coastal development

Cheaper flood insurance doesn’t necessarily mean homeowners hit the beach


  • At a time when almost all Florida counties joined the National Flood Insurance Program (1976-1989), housing development in those communities increased.
  • Defying expectations, Terry researchers found that subsidized insurance through the NFIP led to more construction inland than in coastal areas.
  • For coastal communities that join the NFIP, there may be less concern that they are incentivizing residential development in high-risk areas.

The allure of sand and ocean views comes with the peril of being in harm’s way during hurricanes and flooding.

But the sudden prevalence of flood insurance didn’t necessarily drive construction on Florida’s coast as expected, according to findings by Terry researchers who analyzed 15 key years of housing development in the Sunshine State.

Subsidized insurance through the National Flood Insurance Programing the 1970s and 1980s led to more construction inland than in coastal areas.

“What people would expect is that coastal areas — the highest risk — are presumably the most subsidized and that’s where you’re going to see most of the ‘action,’ but what we find is that there’s comparatively less development in those high-risk areas,” said risk management and insurance associate professor David Eckles.

Flood insurance is required for federally backed mortgages when buying a home in a high-risk flood zone. Lenders also can require flood insurance even when buying a home in moderate- to low-risk areas.

Government-sponsored insurance programs, especially with premiums below actual costs, can distort behavior more than private insurance, the researchers noted.

The conventional wisdom was that if the government was subsidizing the cost of flood insurance, people may be more inclined to move closer to the beach, despite the greater personal and financial risk associated with hurricanes.

Development did increase, as seen through a rise in housing starts and permits, when Florida counties and cities started participating in the NFIP. The researchers examined all Florida counties from 1975 to 1989, a time when almost all communities in the state joined the NFIP.

When separated into coastal and inland (or non-coastal) areas, the findings seemed to defy expectations. After joining the NFIP, housing development in coastal communities decreased while development in non-coastal areas with lower risk showed an increase.

Eckles said the research did not analyze or determine reasons for the development patterns. However, he suspects one factor is the sheer higher cost to comply with regulations, such as building heights, in coastal areas.

In the future, the research could offer insight to counties and cities considering joining the NFIP. Florida stands to be a strong example for policymakers because it comprises a large portion of the active flood insurance policies and total property exposure in the U.S., and its coastal regions are vulnerable to severe storms and flooding, with 2017’s Hurricane Irma being the most recent disaster.

If local leaders and policymakers are mulling the unintended negative consequences of the decisions — known as the “perverse incentive” — of joining the NFIP, they may not have to be concerned about creating more development in high-risk areas for residents, Eckles said.

“It doesn’t appear to be the negative that people tend to think, so it’s not immediately obvious that offering this program is going to put people in harm’s way,” Eckles said.

The paper, “Does National Flood Insurance Program Participation Induce Housing Development?,” was published online in February 2018 by the Journal of Risk and Insurance and was co-authored by Eckles, Mark J. Browne of St. John’s University, the late Carolyn Dehring, and William D. Lastrapes, both of the University of Georgia.