Designing Flood Insurance to Maximize Public Benefits in High‐Risk Areas

ABSTRACT

Maximizing the public benefits of flood insurance in high‐risk areas requires premiums that are affordable and measures that minimize the concentrated demand that causes adverse selection. Governments make policy choices for flood insurance based on their national interests, and these choices lead to variation in how this balance is achieved. This article evaluates the influence of different design elements on the policy objectives identified for the Canadian Flood Insurance Program (CFIP), which include affordability, adequate compensation, and market participation. Combinations of deductibles, limits, exclusions, and subsidies were evaluated using a novel dataset of flood losses from 700,000 simulated flood events to determine how they shape the trade‐offs between these objectives. The optimal design includes a progressive subsidy, premium caps, a moderate deductible, a coverage limit, and exclusions for the highest risk households. These findings offer a useful comparison with international practices and insights for policymakers seeking to maximize the benefits of flood insurance in Canada.