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Moral Hazard in Natural Disaster Insurance Markets: Empirical Evidence from Germany and the United States

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Listed:
  • Paul Hudson
  • W. J. Wouter Botzen
  • Jeffrey Czajkowski
  • Heidi Kreibich

Abstract

Moral hazard in natural disaster insurance markets results in policyholders preparing less, increasing the risk they face. However, moral hazard may not arise, due to high risk aversion or market context. We study the relationship between disaster risk reduction and insurance coverage to assess the presence of moral hazard for two different natural hazards, using four econometric models on survey data from Germany and the United States. The results show that moral hazard is absent. Nevertheless, adverse risk selection may be present. This has significant policy relevance such as opportunities for strengthening the link between insurance and risk reduction measures.

Suggested Citation

  • Paul Hudson & W. J. Wouter Botzen & Jeffrey Czajkowski & Heidi Kreibich, 2017. "Moral Hazard in Natural Disaster Insurance Markets: Empirical Evidence from Germany and the United States," Land Economics, University of Wisconsin Press, vol. 93(2), pages 179-208.
    • Handle: RePEc:uwp:landec:v:93:y:2017:i:2:p:179-208
    Note: DOI: 10.3368/le.93.2.179
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    File URL: http://le.uwpress.org/cgi/reprint/93/2/179
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    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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