The Role of Public and Private Insurance in Reducing Losses from Extreme Weather Events and Disasters

Asia Pacific Journal of Environmental Law, Vol. 19, pp. 29-54, 2016

Sydney Law School Research Paper No. 17/40

26 Pages Posted: 25 May 2017

See all articles by Howard Kunreuther

Howard Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

Rosemary Lyster

The University of Sydney Law School

Date Written: May 24, 2017

Abstract

This paper describes the challenges victims, insurers and governments face in dealing with insurance for low-probability high-consequence events in both developed and developing economies. In developed economies, given their limited experience with catastrophes, there is a tendency for all three parties to engage in short-term intuitive thinking rather than long-term deliberative thinking when making insurance-related decisions. Here, public-private partnerships can encourage investment in protective measures prior to a disaster, deal with affordability problems and provide coverage for catastrophic risks. Insurance premiums based on risk provide signals to residents and business as to the hazards they face and enable insurers to lower premiums for properties where steps have been taken to reduce their risk. To address issues of equity and fairness, homeowners who cannot afford insurance could be given vouchers tied to loans for investing in loss reduction measures. The National Flood Insurance Program provides an opportunity to implement a public-private partnership that could eventually be extended to other extreme events, while the United Kingdom’s Flood Re provides a good case study. In developing economies, insurance penetration is historically very low. This requires innovative solutions to catastrophic risk insurance such as risk pooling, parametric insurance and micro insurance. Nevertheless, the uninsured and uncompensated losses of disasters remain extensive implying the need for public-private partnerships.

Keywords: Extreme weather events, climate disasters, flood insurance, disaster insurance, public-private partnerships, catastrophic risk pooling, parametric insurance, micro insurance

JEL Classification: K10, K23, K30, K32

Suggested Citation

Kunreuther, Howard C. and Lyster, Rosemary, The Role of Public and Private Insurance in Reducing Losses from Extreme Weather Events and Disasters (May 24, 2017). Asia Pacific Journal of Environmental Law, Vol. 19, pp. 29-54, 2016; Sydney Law School Research Paper No. 17/40. Available at SSRN: https://ssrn.com/abstract=2973656

Howard C. Kunreuther (Contact Author)

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
558 & 559 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States
212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

Rosemary Lyster

The University of Sydney Law School ( email )

New Law Building, F10
The University of Sydney
Sydney, NSW 2006
Australia

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