Reflections on U.S. Disaster Insurance Policy for the 21st Century

Abstract

This paper proposes that we examine the feasibility of including earthquake and water damage as part of a global homeowners policy for dealing with the catastrophic risk problem from natural disasters. By undertaking such an analysis one is forced to address the question as to who should pay for disasters and how can we encourage individuals to undertake protective measures in advance of the event. Two key principles underlying any disaster insurance program is that the rates reflect the risk and that coverage is affordable. For lower income individuals it will be impossible to satisfy the first principle without some type of subsidy from the public sector. There are also a set of questions as to whether the private sector has the ability to cover losses from catastrophic disasters on their own or will need some type of public sector involvement. There are a set of related issues that have to be considered when developing any type of disaster insurance program. These include the ability to assess the risk and the uncertainty of the models, the appropriate role of regulation, balancing the concerns of the different stakeholders concerned with this issue and the types of subsidies and back-up provision that can be offered by the public sector. Finally we need a clear understanding of the political and social landscape as well as how choices are actually made so as to develop a disaster insurance program as part of a hazard management strategy that achieve its desired impacts. The challenges in this regard are quite different today than they were in the 20th century because of the magnitude of losses from these disasters in the past few years.Health and Safety