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The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks

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  • Paul R. Kleindorfer
  • Howard Kunreuther

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 fewindividuals 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 partner‐ ship: 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.

Suggested Citation

  • Paul R. Kleindorfer & Howard Kunreuther, 1999. "The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks," Risk Analysis, John Wiley & Sons, vol. 19(4), pages 727-738, August.
    • Handle: RePEc:wly:riskan:v:19:y:1999:i:4:p:727-738
    DOI: 10.1111/j.1539-6924.1999.tb00442.x
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    References listed on IDEAS

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    1. Kunreuther, Howard & Onculer, Aryse & Slovic, Paul, 1998. "Time Insensitivity for Protective Investments: Erratum," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 180-181, November.
    2. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1.
    3. Howard Kunreuther, 1997. "Rethinking Society's Management of Catastrophic Risks*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 22(2), pages 151-176, April.
    4. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
    5. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    6. Kunreuther, Howard & Onculer, Ayse & Slovic, Paul, 1998. "Time Insensitivity for Protective Investments," Journal of Risk and Uncertainty, Springer, vol. 16(3), pages 279-299, July-Aug..
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    Cited by:

    1. Shuhei Nomura & Ryoma Kayano & Shinichi Egawa & Nahoko Harada & Yuichi Koido, 2021. "Expected Scopes of Health Emergency and Disaster Risk Management (Health EDRM): Report on the Expert Workshop at the Annual Conference for the Japanese Association for Disaster Medicine 2020," IJERPH, MDPI, vol. 18(9), pages 1-10, April.
    2. Annegret H. Thieken & Theresia Petrow & Heidi Kreibich & Bruno Merz, 2006. "Insurability and Mitigation of Flood Losses in Private Households in Germany," Risk Analysis, John Wiley & Sons, vol. 26(2), pages 383-395, April.
    3. Howard C. Kunreuther & Joanne Linnerooth‐Bayer, 2003. "The Financial Management of Catastrophic Flood Risks in Emerging‐Economy Countries," Risk Analysis, John Wiley & Sons, vol. 23(3), pages 627-639, June.
    4. Xiao Lin, 2020. "Feeling Is Believing? Evidence From Earthquake Shaking Experience and Insurance Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 351-380, June.
    5. Ivo Vlaev & Petko Kusev & Neil Stewart & Silvio Aldrovandi & Nick Chater, 2010. "Domain Effects and Financial Risk Attitudes," Risk Analysis, John Wiley & Sons, vol. 30(9), pages 1374-1386, September.
    6. Howard C. Kunreuther & Patrick J. McNulty & Yong Kang, 2002. "Third‐Party Inspection as an Alternative to Command and Control Regulation," Risk Analysis, John Wiley & Sons, vol. 22(2), pages 309-318, April.
    7. W. J. W. Botzen & J. C. J. M. Van Den Bergh, 2008. "Insurance Against Climate Change and Flooding in the Netherlands: Present, Future, and Comparison with Other Countries," Risk Analysis, John Wiley & Sons, vol. 28(2), pages 413-426, April.
    8. Kalpit Sharma & Arunabha Mukhopadhyay, 2023. "Cyber-risk Management Framework for Online Gaming Firms: an Artificial Neural Network Approach," Information Systems Frontiers, Springer, vol. 25(5), pages 1757-1778, October.
    9. Dean Gatzlaff & Kathleen McCullough & Lorilee Medders & Charles M. Nyce, 2018. "The Impact of Hurricane Mitigation Features and Inspection Information on House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 566-591, November.
    10. Mohammadali Zolfagharian & Fuad Hasan & Golnaz B. Motie & Gregory D. Squires, 2020. "Perceptions of Home Insurance and Policy Directions: Comparing Mexican Americans and Non‐Hispanic White Americans," Journal of Consumer Affairs, Wiley Blackwell, vol. 54(2), pages 417-455, June.
    11. Mine Cinar & Colton Burns & Nathalie Hilmi & Alain Safa, 2020. "Risk Assessments of Impacts of Climate Changeand Tourism: Lessons for the Mediterranean and Middle East and North African Countries," International Journal of Environmental Sciences & Natural Resources, Juniper Publishers Inc., vol. 24(5), pages 176-187, June.
    12. Lester Lave & Jay Apt, 2006. "Planning for natural disasters in a stochastic world," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 117-130, September.
    13. Howard Kunreuther, 2006. "Disaster Mitigation and Insurance: Learning from Katrina," The ANNALS of the American Academy of Political and Social Science, , vol. 604(1), pages 208-227, March.
    14. Yohannes Kesete & Jiazhen Peng & Yang Gao & Xiaojun Shan & Rachel A. Davidson & Linda K. Nozick & Jamie Kruse, 2014. "Modeling Insurer‐Homeowner Interactions in Managing Natural Disaster Risk," Risk Analysis, John Wiley & Sons, vol. 34(6), pages 1040-1055, June.
    15. Howard Kunreuther & Geoffrey Heal, 2002. "Interdependent Security: The Case of Identical Agents," NBER Working Papers 8871, National Bureau of Economic Research, Inc.

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