Riders on the Storm: Hurricane Risk and Coastal Insurance and Mitigation Decisions
46 Pages Posted: 24 Apr 2017
Date Written: April 23, 2017
This paper utilizes cross-sectional, household-level, survey data combined with data on subjective risk perceptions and experimentally derived risk preferences to analyze the decision to insure against hurricane losses. Our sample encompasses 670 individuals in five states of the United States Gulf Coast Region (Texas, Louisiana, Mississippi, Alabama, and Florida). This study represents one of the few papers to examine wind insurance empirically and the only study to examine flood insurance, wind insurance, and mitigation behavior contemporaneously. Because these decisions are closely related, we employ a mixed-process regression, which allows for correlated error terms across a random-effects bivariate probit model (flood/wind insurance) and a Poisson Log-Normal count model (mitigation). Results indicate positive and statistically significant correlations between the error terms of the insurance and mitigation models but no significant correlation between the error terms of the two insurance models, conditioned on the covariates. We find evidence that risk perceptions and other household factors have some influence on storm risk management, but the strongest effects tend to be related to mandatory insurance requirements associated with location in high-hazard areas.
Keywords: Hurricane, Insurance, Mitigation, Choice, Uncertainty
JEL Classification: C31, D80, Q54
Suggested Citation: Suggested Citation