The Role of Insurance in Reducing Losses from Extreme Events: The Need for Public–Private Partnerships

  • Howard Kunreuther
Shin Research Excellence Award-winning Paper


This paper describes the challenges that consumers, insurers and insurance regulators face in dealing with insurance for low-probability, high-consequence events. Given their limited experience with catastrophes, there is a tendency for all three parties often to engage in short-term intuitive thinking rather than long-term deliberative thinking when making these insurance-related decisions. Public–private partnerships can encourage investment in protective measures prior to a disaster, deal with affordability problems and provide coverage for catastrophic risks. Insurance premiums based on risk provide signals to residents and businesses as to the hazards they face and enable insurers to lower premiums for properties where steps have been taken to reduce risk. To address issues of equity and fairness, homeowners who cannot afford insurance could be given vouchers tied to loans for investing in loss reduction measures. The National Flood Insurance Program provides an opportunity to implement a public–private partnership that could eventually be extended to other extreme events.


natural disasters flood insurance earthquake insurance disaster insurance terrorism public–private partnerships 



This paper reflects research and helpful discussions with my colleagues at the Wharton Risk Center and at other universities and research institutions, notably Jeffrey Czjakowski, Dwight Jaffee, Daniel Kahneman, David Krantz, Robert Meyer, Erwann Michel-Kerjan, Mark Pauly, Robert Shiller, Paul Slovic and Elke Weber. I also appreciate helpful interactions with members of the Wharton Risk Center’s Extreme Events project as to the challenges and opportunities faced by the insurance industry. Special thanks to the reviewers of the paper and to Carol Heller, Joan Lamm-Tennant and Erwann Michel-Kerjan for suggestions on an earlier draft of the paper. Funding for this research comes from the National Science Foundation (SES-1061882 and SES-1062039); the Center for Risk and Economic Analysis of Terrorism Events (CREATE) at the University of Southern California; the Center for Research on Environmental Decisions (CRED; NSF Cooperative Agreement SES-0345840 to Columbia University), the Zurich Insurance Foundation on community flood resilience and the Wharton Risk Management and Decision Processes Center.


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Copyright information

© The International Association for the Study of Insurance Economics 2015

Authors and Affiliations

  • Howard Kunreuther
    • 1
  1. 1.Wharton School, University of PennsylvaniaPhiladelphiaU.S.A.

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