Tuesday, February 14, 2012

Mitigating Disaster Losses through Insurance (1996)


In 1996, an article was published called Mitigating Disaster Losses through Insurance.

The article outlines a problem with disaster losses caused by a "natural disaster syndrome."  The syndrome is characterized by two trends:
  1. limited interest in protection prior to a disaster and 
  2. high costs to insurers and the federal government following a catastrophic event. 
The article offers some useful information. Including...
In theory, insurance is one of the most effective policy tools for achieving both objectives [promote loss reduction mechanisms and place burden of recovery on those who suffer losses], because it rewards investments in cost-effective mitigation with lower premiums and provides indemnification should a disaster occur.  
In practice insurers generally do not charge premiums which encourage loss prevention measures.  They feel that few people would voluntarily adopt these measures based on the small annual premium reduction as compared to upfront costs of investing in these measures.
Five solutions to the syndrome are proposed:
  1. Improve risk estimates
  2. Use seals of approval on structures meeting codes
  3. Use insurance to encourage hazard mitigation (ie. limit coverage to structures with seal of approval)
  4. Consider comprehensive disaster insurance
  5. Expand protection to insurers against catastrophic losses
  6. Subsidize low income families

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