With growing exposure to extreme events, there is a pressing need to identify effective strategies for mitigating and coping with losses. Two widely implemented policies — subsidized insurance and ex post compensation — are compared in this paper. First, a conceptual framework is presented and provides insight into the net benefits and distributional effects of these programs. Then, a case study of flood insurance and compensation uses a benefit–cost analysis (BCA) to illustrate the distribution of net benefits across stakeholders. Findings from the conceptual framework and BCA suggest that an intervention to increase uptake of subsidized flood insurance does not deliver net social benefits relative to the status quo compensation program. Furthermore, subsidized insurance delivers subsidies to wealthier households, while increasing taxpayer burden that can be disproportionately borne by the poor. These results imply that aid and insurance programs should be better coordinated since interactions between these two strategies influence household decisions and the cost of disaster policy. Overall, findings suggest that means-tested or lump sum aid payments could shift benefits to less wealthy households and are reasonable policies in cases where the alternative is a voluntary insurance program with subsidized premiums.
