Monday, February 6, 2012

Myth: By Pricing a Risk "Appropriately" Development and Losses are Controlled

In dealing with meteorological natural disaster risk, there is a common claim that gets tossed around.  It is usually some variation on:

If the risks were priced appropriately (ie. cost increased) then losses would be controlled (i.e. decreased) by way of controlling development.  

For quite some time I have been struggling with this notion as it seems to make sense but it also seems to be not working.  After all, the price of the risk has been increasing for some time and yet, left unadjusted or just by listening to common claims, losses keep increasing.  In fact, even when adjusted, to my understanding, losses are a constant proportion of GDP.  And so, there seems to be little indication that increasing the price of a risk keeps losses down or development.  

Further, this solution does not seem to address the general public problem claim that insurance coverage for such risk is not available or affordable (although, I wonder how useful a problem frame this is as well).  Nor does this solution appear to be the most constructive use of money, a scarce resource, as it the money is not used to address the vulnerability problem.  Instead, if one pays heed to theories of how "extra" money in insurance should be used, then the money would go towards covering additional risks.  In effect, the more money poured into the insurance industry the more risks can be covered and therefore, the more risks will be produced.  As theories go, of course.

It seems, then, that perhaps insurance is not a means to control development.  On the contrary, it is used to support development.  And the more I think about it the more ridiculous the claim sounds.  If the goal is to decrease losses then solutions must address the predominant sources of losses.  It may be that money that would otherwise be spent on paying more for the same product may be better spent in designing better buildings or investigating ways to resolve this mess.

Maybe a good question to ask is, "Who's losses will decrease?"  I have heard that insurers have become concerned about a perceived narrowing between losses and profits. The claim being discussed here may certainly serve to solve this narrowing problem.  But there is no reason to believe that it will solve the public's loss problem. 

1 comment:

  1. I think you've hit the exact nail on it's well insured head.


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