Skip to main content

The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks

Risk Analysis volume 19, pages 727–738 (1999)Cite this article

Abstract

This paper examines the impact that insurance coupled with specific risk mitigation measures (RMMs) could have on reducing losses from hurricanes and earthquakes as well as improving the solvency position of insurers who provide coverage against these hazards. We first explore why relatively few individuals adopt cost-effective RMMs by reporting on the results of empirical studies and controlled laboratory studies. We then investigate the impact that an RMM has on both the expected losses and those from a worst case scenario in two model cities—Oakland (an earthquake-prone area) and Miami/Dade County (a hurricane-prone area) which were constructed respectively with the assistance of two modeling firms. The paper then explores three programs for forging a meaningful public-private sector partnership: well-enforced building codes, insurance premium reductions linked with long-term loans, and lower deductibles on insurance policies tied to mitigation. We conclude by briefly examining four issues for future research on linking mitigation with insurance.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

REFERENCE

  1. P. May and N. Stark, ''Design Professions and Earthquake Policy'' Earthquake Spectra 8115–32 (1992).

    Google Scholar 

  2. Office of Technology Assessment, Reducing Earthquake Losses(USGPO, Washington, DC, 1995).

    Google Scholar 

  3. P. Kleindorfer and H. Kunreuther, ''Challenges Facing the Insurance Industry in Managing Catastrophic Risks'' in K. Froot (ed.), The Financing of Catastrophe Risk(University of Chicago Press, Chicago, 1999).

    Google Scholar 

  4. Insurance Institute for Property Loss Reduction (IBHS) Homes and Hurricanes: Public Opinion Concerning Various Issues Relating to Home Builders, Building Codes and Damage Mitigation(IBHS, Boston, MA, 1995).

    Google Scholar 

  5. L. Levenson, ''Residential Water Heater Damage and Fires Following the Loma Prieta and Big Bear Lake Earthquakes,'' Earthquake Spectra 8595–604 (1998).

    Google Scholar 

  6. R. Palm, M. Hodgson, R. Blanchard, D. Lyons, and D. Lyons, Earthquake Insurance in California: Environmental Policy and Individual Decision Making(Westview Press, Boulder, CO, 1990).

    Google Scholar 

  7. H. Kunreuther, ''Rethinking Society's Management of Catastrophic Risks,'' Geneva.Papers Risk Ins.83151–176 (1997).

    Google Scholar 

  8. R. Palm and J. Carroll. Illusions of Safety: Cultural and Earthquake Hazard Response in California and Japan(Westview Press, Boulder, CO, 1998).

    Google Scholar 

  9. H. Kunreuther, A. Onculer, and P. Slovic, ''Time Insensitivity for Protective Investments,'' J.Risk Uncertainty 16279–299 (1998).

    Google Scholar 

  10. J. Hausman, ''Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables'' Bell J.Econ.10,33–54 (1979).

    Google Scholar 

  11. W. Kempton and M. Neiman (eds.), Energy Efficiency: Perspectives on Individual Behavior,(American Council for an Energy Efficient Economy, Washington, D.C., 1987).

    Google Scholar 

  12. Earthquake Engineering Research Institute, Incentives and Impediments to Improving the Seismic Performance of Buildings(Earthquake Engineering Research Institute, Oakland, CA, 1998).

    Google Scholar 

  13. L. Cohen and R. Noll, ''The Economics of Building Codes to Resist Seismic Structures'' Public PolicyWinter 1–29 (1981).

  14. N. R. Britton, ''Community Attitudes to Natural Hazard Insurance: What Are the Salient Facts?'' in J. Oliver and N. R. Britton, (eds.) Natural Hazards and Reinsurance: Proceedings of Sterling Offices College(Cumberland College of Health Sciences Lidcombe, NSW, 1989), pp. 107–21.

    Google Scholar 

  15. Central U.S. Earthquake Consortium (CUSEC) Disaster Resistant Communities,Memphis, TN, (CUSEC April 1997).

  16. R. Litan, F. Khringold, K. Clark, and J. Khadhkar, Physical Damage and Human Loss: The Economic Impact of Earthquake Mitigation Measures(New York: Insurance Information Institute Press, 1992).

    Google Scholar 

  17. D. Cummins, D. McGill, H. Winkelvoss, and R. Zelten, Consumer Attitudes Toward Auto and Homeowners Insurance(Wharton School Dept. of Insurance, University of Pennsylvania, Philadelphia, PA, 1978).

    Google Scholar 

  18. E. Johnson, J. Hershey, J. Meszaros, and H. Kunreuther, ''Framing, Probability Distortions and Insurance Decisions,'' J.Risk Uncertainty 735–51 (1993).

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Universal Furniture Professor of Decision Sciences and Economics, The Wharton School, University of Pennyslvania, Philadelphia, Pennsylvania 19104

    Paul R. Kleindorfer (Co-director of the Wharton Center for Risk Management and Decision Processes)

  2. The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, 19104

    Howard Kunreuther (Cecilia Yen Koo Professor of Decision Sciences and Public Policy and Management)

Authors
  1. Paul R. Kleindorfer
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Howard Kunreuther
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Kleindorfer, P.R., Kunreuther, H. The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks. Risk Anal 19, 727–738 (1999). https://doi.org/10.1023/A:1007097906602

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1007097906602

  • mitigation
  • insurance
  • catastrophic risk
  • building codes