Closing the flood insurance gap

Replacing the choice to opt-in with the choice to opt-out has proven to be one of the most successful policies to come out of applied behavioral economics. For example, in France citizens are automatically enrolled in the organ donor registry unless they choose to “opt-out.” Only 150,000 people, out of France’s approximately 66 million, have opted out of the program.

A recent McKinsey report suggests that making flood an insured risk on standard homeowners policies in high-risk states and giving homeowners the option to opt-out could generate as much as $50 billion annually in untapped revenue.

Policyholders could decide to opt out of flood insurance, but experience from several markets (terrorism insurance, voluntary retirement contribution, etc.) show many will not.

McKinsey analyzed take up rates for flood insurance in areas most affected by the three Category 4 hurricanes that recently made landfall in the United States — Harvey, Irma and Maria — and said as many as 80 percent of Texas, 60 percent of Florida and 99 percent of Puerto Rico homeowners lacked flood insurance.

“The current opt-in choice design clearly does not work… millions of residents and small business owners are unprotected. The default option—not doing anything—should be one that protects them.” Say the authors of the report.


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