DOI: 10.4324/9781003157571-7
5 Stopping the flow
The aspirational elimination of flood
insurance cross-subsidies in the United
States and the United Kingdom
Rebecca Elliott
In March 2014, The Economist published a short and highly critical piece
about the ways flood risk is priced and pooled through insurance in the
United States and the United Kingdom. Though the two countries rely on
quite different arrangements – a fully public program in the United States
and a private market backed up by a state-organised not-for-profit fund in
the United Kingdom – both systems were subject to reproach for offering
policies that ‘subsidise and pool flood risks instead of pricing them in the
market’ (Anonymous 2014, p. 76). For the anonymous writers at the magazine, this subsidisation was indeed a ‘crime,’ principally because it was
ostensibly blunting incentives that discourage building in flood-prone areas
by keeping rates in high-risk areas artificially low. ‘For flood insurance,’
The Economist concluded, ‘a problem shared may in fact be a problem
doubled—or worse.’
A cross-subsidy exists when one group of policyholders, for one reason
or another, is charged higher premiums so that another group will have
lower premiums. This departs from strict actuarial rating, where everyone pays according to their risk. The Economist is hardly the first or lone
voice pointing to seemingly insidious effects of cross-subsidisation and risk
pooling in flood insurance. In recent years, particularly as the extant and
expected effects of climate change have come into view, an array of researchers, journalists, environmentalists, insurance and reinsurance interests,
think tanks, and others have argued for reforms that bring flood insurance
arrangements more in line with actuarial orthodoxy – that is, establishing rates that reflect individual risk transfer without cross-subsidisation
(Kousky & Shabman 2014).
Yet, risk-sharing and the pooling of resources, of one type or another,
define insurance. Insurance is indeed predicated on ‘a problem shared,’ as
The Economist put it. What’s more, ‘some cross-subsidies will be present
in any insurance program’ (Kousky 2018, p. 25). From the perspective of
the policyholder, taking out insurance may seem like engaging in a kind of
personal savings, where one’s own funds are put away so they are available
in the future. But in fact, insurance works by creating forms of ‘collective
mutuality,’ where participants in the insurance scheme agree to contribute
5 Stopping the flow
The aspirational elimination of flood
insurance cross-subsidies in the United
States and the United Kingdom
Rebecca Elliott
In March 2014, The Economist published a short and highly critical piece
about the ways flood risk is priced and pooled through insurance in the
United States and the United Kingdom. Though the two countries rely on
quite different arrangements – a fully public program in the United States
and a private market backed up by a state-organised not-for-profit fund in
the United Kingdom – both systems were subject to reproach for offering
policies that ‘subsidise and pool flood risks instead of pricing them in the
market’ (Anonymous 2014, p. 76). For the anonymous writers at the magazine, this subsidisation was indeed a ‘crime,’ principally because it was
ostensibly blunting incentives that discourage building in flood-prone areas
by keeping rates in high-risk areas artificially low. ‘For flood insurance,’
The Economist concluded, ‘a problem shared may in fact be a problem
doubled—or worse.’
A cross-subsidy exists when one group of policyholders, for one reason
or another, is charged higher premiums so that another group will have
lower premiums. This departs from strict actuarial rating, where everyone pays according to their risk. The Economist is hardly the first or lone
voice pointing to seemingly insidious effects of cross-subsidisation and risk
pooling in flood insurance. In recent years, particularly as the extant and
expected effects of climate change have come into view, an array of researchers, journalists, environmentalists, insurance and reinsurance interests,
think tanks, and others have argued for reforms that bring flood insurance
arrangements more in line with actuarial orthodoxy – that is, establishing rates that reflect individual risk transfer without cross-subsidisation
(Kousky & Shabman 2014).
Yet, risk-sharing and the pooling of resources, of one type or another,
define insurance. Insurance is indeed predicated on ‘a problem shared,’ as
The Economist put it. What’s more, ‘some cross-subsidies will be present
in any insurance program’ (Kousky 2018, p. 25). From the perspective of
the policyholder, taking out insurance may seem like engaging in a kind of
personal savings, where one’s own funds are put away so they are available
in the future. But in fact, insurance works by creating forms of ‘collective
mutuality,’ where participants in the insurance scheme agree to contribute