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Does Federal Disaster Assistance Reduce the Demand for Insurance Protection? Empirical Evidence.
Wednesday, June 24, 2015
Findings from the Issues Brief

1. How does the receipt of government disaster aid impact the demand for insurance? 

While Individual Assistance (IA) grants provide important financial help to those in need after a disaster, we find that it creates a significant moral hazard effect. Increasing the average IA disaster grant in a ZIP code by $1,000 reduces the average individual demand for insurance in that ZIP code by up to $6,000. 

2. Does the impact depend on the size of the grant? 

Yes. As theory would predict, the higher the grant, the more significant the effect. In fact, we found that when the grant was on the high end of the distribution (top 75 percent quartile), then the moral hazard effect could be up to three times larger. Interestingly, when the grant is on the lower end (lower 25 percent quartile), individuals in that same ZIP code actually purchased more insurance, probably because they found federal aid to be insufficient to cover their costs. 

3. Do people cancel their insurance policy after they received disaster relief grants? 

No. We find that free relief mostly has an impact on the quantity of insurance purchased, not the decision to buy it. Government relief is typically associated with legal requirements to purchase disaster insurance, and those requirements seem to be well enforced, as least for the years that immediately follow the disaster. 

4. Do all government relief programs have the same effect of creating additional risk taking? 

No. This is another important finding. We looked at whether individuals change their insurance purchase behavior after receiving a low‐interest disaster loan from the SBA and found no systematic effect. The difference is that one program provides free grants while the other provides liquidity to victims of disasters to repair or rebuild, but they then have to repay the loan to the federal government over time with interest. 


The question of the future of disaster risk financing has been raised several times after recent disasters. Here we focus on federal government relief to individuals. A complementary question is whether the Stafford Act, which guarantees that 75 percent of a state’s disaster losses (after a Presidential disaster declaration) will be paid by federal taxpayers, also creates moral hazard. While likely, the size of this effect is a matter of empirical analysis and has yet to be quantified.

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