A Look at Jevon’s Paradox and the Rebound Effect: The Unforeseen Backfires of the National Flood Insurance Program

Connor Raney
Babson Germany
Published in
3 min readFeb 8, 2024

To ensure that low-income homes and businesses could afford flood insurance, the United States government established the National Flood Insurance Program (NFIP). A new study suggests that the NFIP may have inadvertently encouraged population growth in flood-prone areas, which could have increased the likelihood of associated damages from storms like Harvey and Katrina¹. People may swarm to these regions due to financial constraints, illustrating the challenge of developing effective risk management strategies that do not promote undesirable behavioral changes.

The NFIP. (https://www.theinsurer.com/news/nfip-extended-to-mid-november-as-us-government-shutdown-avoided/)

This Particular Case

To help property owners cope with the financial impact of flood damage, the NFIP offers affordable insurance. However, there has been a substantial increase in the number of people residing in flood-prone areas since this insurance became available. Specifically, the study found that NFIP-affiliated communities witnessed a 5% increase in population for every standard deviation jump in historical flood risk. The financial costs associated with flood disasters have increased along with the likelihood of property and human deaths caused by this population boom in high-risk areas¹.

Flood Related Damage. (https://www.reuters.com/business/environment/floods-other-water-related-disasters-could-cost-economy-56-trillion-by-2050-2022-08-29/)

Could Anything Have Been Done to Stop This?

It raises the important question: Could the NFIP’s unintended consequences have been prevented? There must be a way found to support those in need while also reducing the incentives for behavior that causes risk. To mitigate these effects, one option is to reevaluate the pricing model for flood insurance considering the varying degrees of risk in different areas. In other words, actuarial risk assessments would replace subsidized rates as the basis for premiums. This change has the potential to discourage new construction in high-risk areas while ensuring that existing residents have access to affordable insurance¹.

Storms Overflowing Roadways. (https://abc30.com/back-to-storms-overflowing-waterways-heavy-rainfall-saturated-ground/12960193/)

Flood Policy Reform: A Guide Through Its Many Facets

A holistic strategy is required to resolve the problems with the NFIP and associated policies. The need of raising public awareness about the risks of living in flood-prone locations cannot be overstated. Launching educational activities and making sure the hazards are conveyed more clearly before homes are sold can help achieve this purpose. Furthermore, zoning, and urban planning restrictions should be put in place immediately to restrict building in flood-prone areas. Building levees and restoring natural floodplains are two examples of flood risk mitigation measures that must be funded if we are to reduce the likelihood of flood damage. To discourage people from settling in and developing in flood-prone areas, one possible change is to institute insurance rate structures that rise in direct proportion to the level of risk¹.

Flood Insurance Policy Example. (https://www.propertycasualty360.com/2017/11/15/the-21st-century-flood-reform-act-whats-in-it/?slreturn=20240108163618)

The Lessons Taught by This Case

Even well-intentioned laws can have unforeseen consequences, as the NFIP example shows. Although providing affordable flood insurance is a commendable program goal, the program’s implementation has highlighted the need for more advanced risk management strategies. To safeguard vulnerable populations without pushing them to relocate to risky places, we might lessen the incentives for risk-taking and increase the provision of support services. Work to strengthen the NFIP and related regulations demonstrates that we are learning more about controlling the link between human behavior and environmental risk¹.

Policy decisions should be well-considered, with the broader implications on risk exposure and human settlement trends carefully considered.

More Examples of Flooding Damage. (https://www.nlc.org/article/2023/07/20/breaking-down-the-national-flood-insurance-program-reauthorization-legislation/)

Sources Used:

¹https://phys.org/news/2024-01-unintended-consequences-national.html

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