The effects of subsidised flood insurance on real estate markets
This paper investigates the effects of a reinsurance scheme which lowers insurance premiums for at-risk properties, leveraging a granular data set of all property transactions and flooding in England. The question that the study aims to answer is how the introduction of a public reinsurance scheme, Flood Re, affects value and liquidity of properties at flood risk in England. The paper contributes to the growing body of literature examining the linkage between climate risks and government interventions and it relates to the broad literature examining distributional effect of public policy interventions,
The paper offers two key policy implications. First, the results highlight the transition risk of public policy interventions. The value of properties at flood risk may experience a sudden adjustment, reflecting the increase in current and future premiums, which can disrupt property and financial markets. Second, the results highlight the plausibly unintended distributional consequences of Flood Re. While Flood Re is expected to help lower-income households, our results suggest that Flood Re has a weak impact in lower income and more deprived areas but a stronger impact in higher income and less deprived areas. This finding provides a unique insight in examining the effectiveness of Flood Re and the design of future public policies in mitigating climate risk.