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Insurance for Catastrophes: Why Are Natural Hazards Underinsured, and Does It Matter?

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Advances in Spatial and Economic Modeling of Disaster Impacts

Part of the book series: Advances in Spatial Science ((ADVSPATIAL))

Abstract

This chapter describes the state of our knowledge about the impacts of disaster insurance. To narrow our discussion, we concentrate on agricultural insurance (for droughts and floods) and earthquake insurance (for buildings and infrastructure) and describe the current state of these two markets globally. We then briefly discuss the more commonly investigated puzzles about the demand and supply of insurance in these domains. Potential purchasers of insurance (households, commercial firms, infrastructure owners, local and central governments) appear to undervalue catastrophic insurance and thus the demand for insurance is typically below what standard economic models with risk averse agents would predict. Equally, the supply of insurance contracts also appears to be limited in both of these markets. Both of these puzzles have been surveyed before. Our main focus is to describe the more sparse literature about the impacts of having these insurance covers. We ask how the presence of insurance may change the ways the insured assess risk, and how its presence changes outcomes following catastrophic events. We end with some directions for future research on the impacts of disaster insurance.

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Notes

  1. 1.

    A previous version of this paper is publicly available as Noy et al. (2017).

  2. 2.

    The cost of the earthquake in Japan was mostly associated with damage from the tsunami that was generated by the earthquake, and to a lesser extent by the Fukushima nuclear meltdown that was triggered by the loss of power caused by the earthquake and tsunami damage.

  3. 3.

    In contrast with the neo-classical/expected utility theory– the model that is often used to assess the optimal demand for insurance.

  4. 4.

    AMI Insurance (AMI) was the second largest residential insurer in New Zealand. Because of its high market share in the affected region (35%), the private insurer was exposed to a loss of $NZ1.8 billion following the 2010–2011 Canterbury earthquake sequence. However, AMI only had $NZ300 million in capital reserves. Consequently, New Zealand Government had to bail out AMI by settling $NZ 1.5 billion of AMI earthquake claims, administrated through a state-owned entity, Southern Response.

  5. 5.

    Nguyen and Noy (2017) compares the three programs in high-income countries (US, Japan, and New Zealand), and calculates how much each one would have hypothetically paid had they experienced an event similar to the Christchurch (NZ) 2011 earthquake sequence.

  6. 6.

    The insured amount is the lower value of either the damaged land’s market value or the cost to repair the land to its pre-event condition. This proved to be a contentious issue in cases where the 2011 earthquake caused liquefaction.

  7. 7.

    The cost was tripled from 5 cents after international reinsurers increased their premiums in the aftermath of the 2011 earthquake. It is scheduled to rise again to 20 cents at the end of 2017, as a consequence of another damaging earthquake in November 2016.

  8. 8.

    The Niigata Earthquake (M 7.5) happened on June 16, 1964, and damaged nine prefectures. The earthquake, ground liquefaction and flooding caused significant damages to infrastructures and residential properties in the region.

  9. 9.

    For the 2014/2015 policy year, for example, member countries selected attachment point return periods in the range 10–30 years for tropical cyclones; 20–100 years for earthquakes and 5 years for excess rainfall events. CCRIF member countries also selected exhaustion point return periods in the range of 75–180 years for tropical cyclones; 100–250 years for earthquakes and 25 years for excess rainfall events, with maximum coverage of approximately US$100M currently available for each peril (CCRIF SPC 2016).

  10. 10.

    Businesses were not entitled to full business interruption insurance if their building was located inside the cordon but was unaffected by the earthquakes.

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Authors and Affiliations

  1. Victoria University of Wellington, Wellington, New Zealand

    Aditya Kusuma, Cuong Nguyen & Ilan Noy

Authors
  1. Aditya Kusuma
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  2. Cuong Nguyen
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  3. Ilan Noy
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Correspondence to Ilan Noy .

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Editors and Affiliations

  1. University of Kitakyushu, Kitakyushu, Japan

    Yasuhide Okuyama

  2. Sol Price School of Public Policy, University of Southern California, Los Angeles, CA, USA

    Adam Rose

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Kusuma, A., Nguyen, C., Noy, I. (2019). Insurance for Catastrophes: Why Are Natural Hazards Underinsured, and Does It Matter?. In: Okuyama, Y., Rose, A. (eds) Advances in Spatial and Economic Modeling of Disaster Impacts. Advances in Spatial Science. Springer, Cham. https://doi.org/10.1007/978-3-030-16237-5_3

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