Creating incentives to purchase disaster insurance

Natural disasters have become more common and more expensive – still, death, injury, and financial losses can be reduced through incentives to purchase insurance and install protective measures. This is the argument made in an article on the topic in Fall 2011 edition of Issues in Science and Technology.

Authors Howard Kunreuther and Erwann Michel-Kerjan of the University of Pennsylvania’s Wharton School write that despite increasing losses from natural disasters in recent years, few property owners in hazard-prone areas have purchased adequate disaster insurance. Moreover, many who buy insurance often let their policies lapse after a few years. In addition, few property owners invest in measures to fortify their properties.

Kunreuther and Michel-Kerjan propose a comprehensive program that creates incentives to encourage property owners in high-risk areas to purchase insurance to protect themselves financially in the event of losses from disasters. These property owners should also be encouraged to undertake measures to reduce property damage and the accompanying injuries and fatalities from future disasters.

The authors note that one proposal is to tie insurance and other protective measures to the property rather than the property owner, as is currently the case. This would help spread costs out over time and deal with the reluctance of property owners to invest in loss-prevention measures because the upfront costs often far exceed the short-run benefits.

— Read more in Howard Kunreuther and Erwann Michael-Kerjan, “People Get Ready,” Issues in Science and Technology (Fall 2011)