Journal of Risk and Uncertainty

, Volume 12, Issue 2–3, pp 171–187 | Cite as

Mitigating disaster losses through insurance

  • Howard Kunreuther


Losses from natural disasters have increased in recent years due to growth of population in hazard-prone areas and inadequate enforcement of building codes. This article first examines why homeowners have not voluntarily adopted cost-effective protective measures and have limited interest in purchasing insurance. It then proposes a disaster-management program which utilizes insurance coupled with well-enforced building codes to reduce future damage. Banks and financial institutions play a key role in this program by requiring inspections of homes as a condition for a mortgage. New forms of reinsurance coverage against catastrophic losses from natural disasters are necessary to protect insurers against potential insolvency from the next mega-disaster.

Key words

natural hazards protective behavior insurance building codes 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Baron, Jonathan, Rajeev, Gowda, and Howard, Kunreuther. (1993). “Attitudes Toward Managing Hazardous Waste: What Should Be Cleaned Up and Who Should Pay for It?”Risk Analysis 13, 183–192.Google Scholar
  2. Burby, Raymond (1992)Sharing Environmental Risks. Boulder, CO: Westview Press.Google Scholar
  3. Camerer, Colin, and Howard, Kunreuther. (1989). “Decision Processes for Low Probability Events: Policy Implications“,Journal of Policy Analysis and Management 8:565–592.Google Scholar
  4. Committee on Banking, Finance and Urban Affairs. (1989).National Flood Insurance Program Hearings before the Subcomittee on Policy Research and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, 101 st Congress, 1 st Session. Washington, D.C.: Government Printing Office.Google Scholar
  5. Culp, Christopher (1996) “Relations Between Insurance and Derivatives: Applications from Catastrophic Loss Insurance” Paper presented at Competitive Enterprise Institute Conference on “Rethinking Insurance Regulation” Washington, D.C. March.Google Scholar
  6. Cummins, David, and Helyette Geman. (1995). “Pricing Catastrophe Insurance Futures and Call Spreads: An Arbitrage Approach,”The Journal of Fixed Income (March), 46–57.Google Scholar
  7. Doherty, Neil, Lisa, Posey, and Anne, Kleffner. (1992).Insurance Surplus: Its Function, Its Accumulation and Its Depletion. Boston: The Earthquake Project.Google Scholar
  8. Doherty, Neil, and Lisa Posey. (1992). “Availability Crises in Insurance Markets.” Working paper, Wharton School, University of Pennsylvania.Google Scholar
  9. Dong, Weimin, Haresh Shah, and Felix Wong. (1996). “A Rational Approach to Pricing of Catastrophe Insurance,”Journal of Risk and Uncertainty 12.Google Scholar
  10. Gately, D. (1980). “Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables: Comment,”Bell Journal of Economics 11, 373–74.Google Scholar
  11. Hausman, Jerry (1979) “Individual Discount Rates and the Purchase and Utlization of Energy-Using Durables”Bell Journal of Economics 10,33–54.Google Scholar
  12. Hunter, J. Robert. (1994). “Insuring Against Natural Disaster,”NAIC Journal of Insurance 12:467–85 (Summer).Google Scholar
  13. Insurance Institute for Property Loss Reduction. (1995).Coastal Exposure and Community Protection. Boston, MA: IIPLR.Google Scholar
  14. Insurance Institute for Property Loss Reduction. (1995a).Homes and Hurricanes: Public Opinion Concerning Various Issues Relating to Home Builders, Building Codes and Damage Mitigation. Boston, MA: IIPLR.Google Scholar
  15. Insurance Research Council and Insurance Institute for Property Loss Reduction. (1995).Coastal Exposure and Community Protection: Hurricane Andrew's Legacy. Wheaton, IL: IRC; Boston, MA: IIPLR.Google Scholar
  16. Insurance Services Office. (1994).The Impact of Catastrophes on Property Insurance. New York: Insurance Services Office.Google Scholar
  17. Interagency Floodplain Management Review Committee. (1994).Sharing the Challenge: Floodplain Management into the 21 st Century. Washington, D.C: Government Printing Office.Google Scholar
  18. Kahneman, Daniel, and Amos, Tversky. (1979). “Prospect Theory: An Analysis of Decision Under Risk,”Econometrica 47,263–91.Google Scholar
  19. Karr, Albert. (1993). “High Costs and False Sense of Security Prevent Many on Flood Plains from Buying Insurance,”Wall Street Journal, Aug. 31, p. A12.Google Scholar
  20. Kempton, Willett, and Max, Neimann, eds. (1987).Energy Efficiency: Perspectives on Individual Behavior. Washington, D.C.: American Council for an Energy-Efficient Economy.Google Scholar
  21. Kunreuther, Howard et al. (1978).Disaster Insurance Protection: Public Policy Lessons. New York: John WileyGoogle Scholar
  22. Kunreuther, Howard, Neil Doherty, and Anne Kleffner. (1992). “How Should Society Deal with the Earthquake Problem?”Regulation (Spring), 60–68.Google Scholar
  23. Kunreuther, Howard., Meszaros, Jacqueline, Hogarth, Robin and Spranca, Mark (1995) “Ambiguity and Underwriter Decision Processes”Journal of Economic Behavior and Organization 26, 337–52.Google Scholar
  24. Lewis, Christopher and Murdock, Kevin (1996) “The Role of Government Contracts in Discretionary Reinsurance Markets for Natural Disasters” Paper presented at the Allied Social Sciences Association Meeting, San Francisco, CA January 6.Google Scholar
  25. Lowenstein, George. (1987). “Anticipation and the Valuation of Delayed Consumption,”Economic Journal 97,666–684.Google Scholar
  26. Moore, Harry. (1964)....And the Winds Blew. Austin: The Hogg Foundation for Mental Health.Google Scholar
  27. Palm, Risa. (1995).Earthquake Insurance: A Longitudinal Study of California Homeowners. Boulder: Westview Press.Google Scholar
  28. Palm, Risa, Michael, Hodgson, R. Denise, Blanchard, and Donald, Lyons. (1990).Earthquake Insurance in California: Environmental Policy and Individual Decision Making. Boulder: Westview Press.Google Scholar
  29. Paragon Viewpoint. (1994). “Florida Involuntary Wind Facilities.” Mimeo, Paragon Reinsurance Management Services, Minneapolis, MN.Google Scholar
  30. Rejda, George. (1982).Principles of Insurance. Glenview, IL: Scott, Foresman and Co.Google Scholar
  31. Russell, Thomas and Jaffee, Dwight (1995) “Catastrophe Insurance, Dynamic Premium Strategies and the Marker for Capital” Prepared for 1995 NAIC/ARIA Symposium Issues in Insurance Regulation San Antonio, Texas December.Google Scholar
  32. Swiss, Re. (1994). “Natural Catastrophes and Major Losses in 1993,”Sigma Economic Studies No. 2/94. (Zurich: Swiss Reinsurance Company).Google Scholar
  33. Snyder, J. (1993). “Hurricane Andrew: A Postmortem,”Best's Review (January) (16), 105–108.Google Scholar
  34. Tversky, Amos, Shmuel, Sattath, and Paul, Slovic. (1988). “Contingent Weighting in Judgment and Choice,”Psychological Review 95,371–84.Google Scholar
  35. U.S. Congress. (1995).Federal Disaster Assistance Report of the Senate Task Force on Funding Disaster Relief. Washington, D.C.: U.S. Government Printing Office.Google Scholar
  36. U.S. General Accounting Office. (1990).Flood Insurance: Information on the Mandatory Purchase Requirement. Washington, D.C., August.Google Scholar
  37. Unnewehr, David. (1994). “The Legacy of Hurricane Andrew: What Price Life, Safety and Community?”Proceedings of the June 1994 Insurance Institute for Property Loss Reduction Congress. Boston: Insurance Institute for Property Loss Reduction.Google Scholar
  38. Winter, Ralph. (1991). “The Liability Insurance Market,”Journal of Economic Perspectives (5), 115–136.Google Scholar
  39. Winter, Ralph. (1988). “The Liability Crisis and the Dynamics of Competitive Insurance Markets,”Yale Journal of Regulation (5), 455–500.Google Scholar

Copyright information

© Kluwer Academic Publishers 1996

Authors and Affiliations

  • Howard Kunreuther
    • 1
  1. 1.Center for Risk Management and Decision Processes, Wharton SchoolUniversity of PennsylvaniaPhiladelphia

Personalised recommendations