This paper proposes long-term insurance (LTI) as an alternative to the standard annual property insurance policy. LTI offers significant benefits to many stakeholders by reducing insurers’ administrative costs, lowering search costs, providing stability to consumers and incentivizing property owners to invest in risk-reducing measures. A simple two-period model illustrates situations that would make a long-term contract attractive to both insurers and consumers under competitive market conditions. Recognizing potential difficulties in modifying regulatory systems in 50 states, and using the history of the development of long-term mortgages in the United States as a benchmark, we discuss the applicability of long-term contracts for reforming the federally-run U.S. National Flood Insurance Program (NFIP). Multi-year flood insurance policies would encourage investments in cost-effective mitigation measures and provide stability to the program, in view of the large number of homeowners who cancel their annual policies after just two or three years. The paper concludes with issues and questions that need to be addressed for multi-year property insurance policies to be considered by private sector firms.

It is well known that insurance costs increase significantly following large-scale natural disasters such as major hurricanes and earthquakes. In the aftermath of the seven major hurricanes that made landfall in the United States in 2004 and 2005, the average homeowner’s premium in the state of Florida more than doubled, from $723 at the start of 2002, to $1,465 in the first quarter of 2007 (Klein, 2009; Kunreuther and Michel-Kerjan, 2009). In coastal areas, insurers were permitted by regulators to triple or even quadruple their premiums for some homeowners. While the market price of insurance has significantly increased in coastal areas (especially Florida), insurers are still concerned that their long-term earnings will be negative in high-risk areas, leading some to refuse to renew policies in coastal areas subject to hurricanes. In February 2007, State Farm, the largest homeowner insurer in Mississippi, stopped selling new policies on homes and small businesses there (Treaster, 2007). Allstate, another giant provider of residential insurance, announced it would restrict new homeowners’ policies in New Jersey, Connecticut, Delaware and New York City (Vitello, 2007). In January 2009, State Farm announced that it would pull out of Florida’s insurance market over the next two years unless it was granted a significant increase in its homeowners’ premium by the insurance regulator. The insurance company, which stopped writing new homeowners policies in Florida in 2008, said it was left with little choice but to abandon the property line. Only after Insurance Commissioner Kevin McCarty allowed State Farm to drop 125,000 policies and granted it a nearly 15 percent increase did the insurer agree to remain in the state. Had State Farm pulled out of Florida, 806,000 households would have been looking for coverage (Miller, 2009).