Catastrophe Insurance Challenges for the U.S. and Asia

This paper examines the role that insurance and mitigation can play in reducing losses from natural disasters using data collected as part of a large-scale study on catastrophic risk jointly undertaken by the Wharton Risk Management Center in conjunction with Georgia State University and the Insurance Information Institute. Section 1 graphically demonstrates why disaster losses have increased in the past twenty-five years and the magnitude of the problem today. Section 2 uses data on residential homes from four states facing severe risks from hurricanes to show how mitigation measures can reduce future losses and discusses why individuals do not adopt loss-reduction measures voluntarily. Section 3 shows how insurance premiums can be used to incentivize homeowners to invest in protective measures if disaster coverage programs adhere to a set of guiding principles. Section 4 then proposes long-term insurance as a way of reducing losses from future disasters and addressing concerns facing insurers and homeowners in hazard-prone areas. I then examine the question as to whether policies should include all-hazards (Section 5) and briefly discusses lessons form the earthquake insurance market in Japan. (Section 6). The paper concludes with a summary of the key points in the paper and proposes a set of open questions for future research in this area.