The consequences of subsidised flood insurance coverage on actual property markets – Financial institution Underground

shutterstock 1435687571


Nicola Garbarino, Benjamin Guin and Jonathan Lee

shutterstock 1435687571
The consequences of subsidised flood insurance coverage on actual property markets – Financial institution Underground 32

5.2 million properties in England are susceptible to flooding. To make sure the provision and affordability of flood insurance coverage to households in flood-prone areas, the UK Authorities launched an revolutionary reinsurance scheme, Flood Re, in April 2016. It supplies insurers with an choice to move the flood-risk aspect of their insurance policies on to the reinsurer at a decrease fastened worth based on property council tax band. In a lately revealed Workers Working Paper, we make use of a granular information set of all property transactions and flood occasions in England. We estimate the impact of Flood Re on property values. We additionally discover if Flood Re results are heterogeneous throughout totally different subpopulations in England.

Flood Re reduces insurance coverage premiums for households in flood-risk areas by over half for 4 out of 5 properties with earlier flood claims. This could enhance the values of flood-prone properties. Nonetheless, in concept, the magnitude of this property worth impact is determined by the anticipated discount in future insurance coverage premiums brought on by Flood Re in addition to the speed in discounting future insurance coverage premiums. Furthermore, the Flood Re impact would possibly differ by space and demographic teams on account of variations in flood threat and residential possession. 

Empirical method to determine the house-price impact of Flood Re

In our analysis, we study properties in England. We make use of a ‘repeat gross sales method’ analyzing solely these 1.5 million properties constructed earlier than 2002 and offered a number of occasions. Particularly, we regress the change in property worth on their publicity to flooding. In our regression, we work together this flood publicity with a binary variable capturing the time interval when Flood Re was working. The character of this analysis design permits us to account for unobservable and time-invariant property traits, by analyzing the impact of floods on property costs each earlier than and after Flood Re got here in. To gauge heterogeneous results of the coverage, we then estimate our regression in numerous subsamples. To that finish, we slice our information by property values and totally different regional traits, reminiscent of their revenue stage, obtained from the Workplace of Nationwide Statistics.

See also
Open Account On-line at Union Financial institution: Step-by-Step-Guide

Common influence of Flood Re on property costs

Chart 1 illustrates the impact of Flood Re on costs of flooded properties. We first run our regression on the complete pattern of properties in England. We discover that flood occasions cut back property values by greater than 1.5% relative to their first transition earlier than the introduction of Flood Re. This damaging impact is totally mitigated after the introduction of Flood Re.

Chart 1: Impact of Flood Re on property costs

Figure 1
The consequences of subsidised flood insurance coverage on actual property markets – Financial institution Underground 33

For a median property, the introduction of Flood Re will increase the relative worth of properties on account of flooding by £4,083. We then conduct a back-of-the-envelope calculation among the many 5.2 million properties which can be susceptible to flooding in England. It means that the subsidisation of Flood Re will increase the entire worth of flooded properties by £212.3 million per yr, assuming only one% of the at-risk properties are flooded yearly. The entire impact of Flood Re on property values would double to £424.6 million if flood-risk chance additional will increase to 2%.

Our outcomes recommend that Flood Re additionally will increase the transaction volumes of properties in at-risk areas. Chart 2 outlines the consequences of Flood Re on the transaction volumes of flooded properties. Our outcomes recommend {that a} flooded property has a 3.6% discount within the annual chance of transacting earlier than Flood Re got here into place. Flood Re greater than offsets this damaging impact on the transaction chance and will increase the transaction of flooded properties.

Chart 2: Impact of Flood Re on market liquidity

Figure 2
The consequences of subsidised flood insurance coverage on actual property markets – Financial institution Underground 34

Regional heterogeneity within the response of property costs

We additionally discover heterogeneous results of Flood Re in numerous areas throughout England. To that finish, we create subsamples by using median values of key variables to separate the unique pattern in half. The impact of Flood Re is stronger in city areas with a better revenue and an older inhabitants in addition to areas with extra rental properties. Whereas it might be attention-grabbing to determine the channels resulting in the heterogeneous results, our examine leaves this query to future analysis because of the lack of extra granular information.

See also
Why investment banking best answers - 7 Tips to Remember

Conclusion and dialogue

Our outcomes illustrate two key implications. First, we doc heterogeneous Flood Re results. Curiously, our outcomes recommend that Flood Re has a weak influence in lower-income areas however a stronger influence in higher-income areas. These outcomes may be seen as proof hinting at distributional penalties of this reinsurance scheme when it comes to wealth amongst householders in England.

Second, the outcomes are related for the transition threat of public coverage interventions. Flood Re is predicted to be phased out in 2039. The flood-risk element of property insurance coverage could subsequently be totally priced into premiums by that point. Consequently, the worth of properties at flood threat could expertise a sudden adjustment, reflecting the rise in present and future premiums. Nonetheless, the magnitude of the impact that we estimate doesn’t seem giant sufficient to disrupt property and monetary markets, however this will change if flood-risk perceptions change within the subsequent a long time.

Nicola Garbarino works on the Ludwig Maximilian College of Munich and the Ifo Institute, Benjamin Guin works within the Financial institution’s Technique and Coverage Method Division and Jonathan Lee works on the College of Glasgow.

If you wish to get in contact, please e-mail us at or go away a remark beneath.

Feedback will solely seem as soon as accepted by a moderator, and are solely revealed the place a full title is provided. Financial institution Underground is a weblog for Financial institution of England workers to share views that problem – or help – prevailing coverage orthodoxies. The views expressed listed below are these of the authors, and usually are not essentially these of the Financial institution of England, or its coverage committees.