Abstract
The insurance industry has suffered very large losses in the past 10 years from natural disasters and has the potential for experiencing even greater losses in the future. This chapter examines the role that insurance coupled with cost-effective risk mitigation measures (RMMs) can play in managing the risks from natural disasters. Large insurers have incentives to provide premium reductions to encourage RMMs if the allowable premiums are sufficiently high that they can pass the savings in losses to the property owner or if they are required to continue providing their current policyholders with coverage. Small insurers also have incentives to encourage their policyholders to adopt mitigation measures through premium reductions so as to reduce their chances of insolvency from a large-scale disaster. They may also want to consider purchasing reinsurance to cover a portion of their excess losses. Well-enforced building codes can complement insurance by forcing the adoption of cost-effective RMMs. They may be needed because many property owners underestimate the risks from disasters. In addition, mitigation measures not only reduce losses to the property itself but may produce positive externalities by reducing other costs of a disaster. The chapter concludes by outlining the roles that financial institutions, real estate developers and municipalities can play in developing incentives for the adoption of cost-effective RMMs and suggesting directions for future research.
Special thanks to two anonymous referees for their helpful comments on an earlier version of this paper. I have benefited greatly from discussions with my colleagues from the Wharton Managing Catastrophic Risk Project on topics covered in the paper: Vivek Bantwal, Peter Burns, David Croson, David Cummins, Neil Doherty, Patricia Grossi, Robert Klein, Paul Kleindorfer, Robert Meyer and Tony Santomero. Partial support from NSF Grant # 524603 and the Wharton Risk Management and Decision Processes Center is gratefully acknowledged.Protions of the paper are based on an invited paper presented at the Fifth Alexander Howden (Australia) Conference on Disaster Insurabce, Gold Coast, August, 1997.
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Kunreuther, H. (2000). Linking Insurance and Mitigation to Manage Natural Disaster Risk. In: Dionne, G. (eds) Handbook of Insurance. Huebner International Series on Risk, Insurance, and Economic Security, vol 22. Springer, Dordrecht. https://doi.org/10.1007/978-94-010-0642-2_18
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DOI: https://doi.org/10.1007/978-94-010-0642-2_18
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