Working Paper: NBER ID: w12503
Authors: Howard Kunreuther; Mark Pauly
Abstract: This paper explores options for programs to be put in place prior to a disaster to avoid large and often poorly-managed expenditures following a catastrophe and to provide appropriate protection against the risk of those large losses which do occur. The lack of interest in insurance protection and mitigation by property owners and by public sector agencies prior to a disaster often creates major problems following a catastrophic event for victims and the government. Property owners who suffer severe damage may not have the financial resources easily at hand to rebuild their property and hence will demand relief. The government is then likely to respond with costly but poorly targeted disaster assistance. To avoid these large and often uneven ex post expenditures, we consider the option of mandatory comprehensive private disaster insurance with risk based rates. It may be more efficient to have an ex ante public program to ensure coverage of catastrophic losses and to subsidize low income residents who cannot afford coverage rather than the current largely ex post public disaster relief program.
Keywords: disaster insurance; public policy; Hurricane Katrina; risk management
JEL Codes: G22; H23; H44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of interest in insurance protection and mitigation by property owners and public sector agencies (G52) | major problems following catastrophic events (H84) |
| severe damage to property owners (H13) | demand for costly government relief (H84) |
| mandatory comprehensive private disaster insurance with risk-based rates (G52) | reduction of government expenditures on disaster relief (H84) |
| individuals moving into hazard-prone areas without adequately considering the risks (R23) | low private insurance uptake (G52) |
| low private insurance uptake (G52) | high government spending on disaster recovery (H84) |
| requiring insurance (G52) | mitigate adverse effects of low private insurance uptake and high government spending on disaster recovery (H84) |