Natural Disaster Insurance and The Equity-Efficiency Trade-Off
This article written by Pierre Picard investigates the role of private insurance in the prevention and mitigation of natural disasters. it characterizes the equity-efficiency trade-off between policy makers under imperfect information about individual prevention costs
Pierre Picard , with one simple model, illustrates how tax cuts on insurance contracts can improve incentives to prevention of natural disasters.
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and highlights complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdiction.
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INTRODUCTION
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Insurers can, also, convey incentives for prevention through price signals.
This may be done by charging risk-adjusted insurance premiums for property insurance or business interruption insurance in order to discourage the development of new housing or productive investment in hazard-prone areas or to incite property developers to comply with building codes.
However, using insurance pricing to mitigate natural disasters is not an easy task ! First, individuals may prefer to rely on postdisaster assistance from governments or nongovernment organizations (NGOs) rather than paying an insurance premium to protect themselves against the consequences of natural hazards. Second, property owners may underestimate their true loss probability. : they do not understand low probabilities well (they may think a "100-year return flood" will not come back before 100 year !), Third, They may be myopic and consider that insurance is a bad investment and decide to cancel their policy if no catastrophe occurs during several years, Fourth, lower income consumers have difficulty affording insurance, and of course this is important problem in developing countries. Fifth, because of adverse selection the burden may be concentrated on high-risk individuals, which makes it even heavier.
EQUITY AND EFFICIENCY IN
The poor faces two types of risk Idiosyncratic (specific for home) and Covariate (Drought, epidemics, etc.). To combat in original Risk, the poor make proactive risk management - grain storage, savings, assets
The National Flood Insurance Program (NFIP) was established to provide government subsidized flood insurance and is administered by the Federal Emergency Management Agency (FEMA). Since Hurricane Katrina in 2005, the United States has experienced a series of major flood events that has required the NFIP to borrow from the U.S. Department of Treasury. The program is currently $24 billion in debt (Landers, 2014, p. 16). There are a number of areas where the NFIP has been reviewed and already reformed to help reduce costs like reducing administrative costs to manage the program. However, more significant reform is needed to be able to maintain and fund this program. A combination of changes will provide the best results. One direction is to increase the funding base for the program by increasing participation and increasing premiums. Another option is to reduce the cost of the program by shifting some burden to private insurers. In order to become and remain financially solvent, the National Flood Insurance Program needs to be reformed: the NFIP should remain a government administered program with a reform focused on increasing program participation through education and enforcement, and adjusting premiums to reflect actual risks; the NFIP should incorporate privatization through a public-private partnership with insurance companies to provide catastrophic insurance coverage.
Truly, human beings are left powerless to control the detrimental effects that Mother Nature has on their lives when a natural disaster hits.
people's lives. After each natural disaster there can be a lot of damage to homes, buildings, and cities. Each can
In this text, Dr. Jorn Birkmann takes an in-depth look at the interaction between society and natural hazards. Birkmann explores, among other things, the concept of vulnerability and how it relates to calamity. There is a focus on how the knowledge of particular natural hazard can be combined with information regarding the vulnerability of a society before a disaster to reduce risk. Overall, this text will provide me with relevant information on the complex interactions between natural hazards and society.
According to UNISDR (2009), disaster can be defined as “a serious disruption of the functioning of a community or a society involving widespread human, material, economic or environmental losses and impacts, which exceeds the ability of the affected community or society to cope using its own resources.” Disaster risk is the combination of likelihood of a catastrophic event occurring; the exposure to the affected areas; and vulnerability of the affected communities or country (Global Reinsurance Forum, 2014). The impacts of disaster risk include not only loss of life and physical damages but also increase the potential outbreak of secondary hazards such as diseases and negative effect on physical, mental and social wellbeing of human being, services, social, economic and environment sectors. Disaster risk management include avoiding or mitigating the potential of hazard occurrence and exposure and reducing the vulnerability level by strengthening the tangible and intangible capacities.
Commercial insurance plays a major role mitigating the effects of a disaster but does not solve the problem. If a larger disaster occurs a minute detail could lead to an insurance company refusing to pay for any damage. Due to large increases of insurance claims in natural disasters a lot of attention has been placed on this issue by the government placing economic strain. Also higher premiums are a typical result. Insurance companies have also been reluctant to cover higher risk areas (e.g., flood prone environments and flood insurance). Due to the large amount of issues with commercial insurance, the government has created its own disaster/insurance fund to help pay for floods. This would qualify only newer houses with disaster preparedness qualities for state insurance. Structural preparedness has, in the recent years, been more reliant on the individual. Therefore flood plain management, structural
Insurance allows people, organizations and different elements to ensure themselves against significant potential misfortunes and money related hardship at a sensibly reasonable rate.
NFIP was created to reduce federal disaster aid by requiring homeowners in floodplain areas to buy insurance that would replace government grants and loans. FEMA estimates that federal disaster aid is reduced by $100 for every $300 worth of flood insurance that is sold. (David C, John. 2003) What’s more, one important principle of NFIP is to allow people to bear the costs of their choice of places and to reduce the burden on taxpayers nationwide. In general, this program includes three parts: providing flood insurance, implementing flood zone management rules and drawing flood insurance rate map.
Federal and non-federal mitigation programs refer to the funding provided by the federal and state bodies respectively for mitigation programs. FEMA set up programs that support mitigation. SBA, EDA, HUD are some examples. Being federally funded by the government their main is to reduce risk and provide benefits which exceed cost.
Poor lifestyle choices of an individual can decrease one’s optimal health. Factors such as smoking, unprotected sex, working around hazardous waste, and driving without a seatbelt; are all choices that effects one’s health. Also, genetic factors such as diabetes, high blood pressure, high cholesterol, and even some cancers can increase the chances of a decline in the health of an individual. Poor lifestyle choices and genetics effect a great deal of citizens in the U.S which can cause a damper in the health of the nation as a whole.
Mr. Brent Woodworth, Chairman of Multihazard Mitigation Council realize this when he testified before Congress about mitigation is a cost saving program that every dollar spent, four dollars will be save, “Bottom line, the total mitigation investment expenditure during the study period was $3.5 billion. The financial benefit to the population from investing in mitigation efforts during the study period was valued at approximately
Natural disasters can have a significant impact on the health of a countries population. A disaster is defined as “any occurrence that causes damage, ecological destruction, loss of human lives, or deterioration of health and health services on a scale sufficient to warrant an extraordinary response.” 1 Several factors play into how severly a country will be impacted following a natural disaster such as their economic status, access to healthcare services, infrastructure, political economies, etc. As the world is currently dealing with climate change affecting weather patterns countries in the Caribbean and Latin America are more at risk now than ever to face natural disasters. Latin America and the Caribbean faced a year of disaster in
So, you can see that there are a lot of reasons to buy the hurricane insurance. Analyzing Joe Martinez’s earnings (175 000$ annually), we can say that the total premium for $ 13 000 is quite large amount (7% of annual earnings). If we will compare this amount with his monthly earnings ($ 14 583) it is 89%. But from another point of view, his eventual losses from hurricane’s devastation maximum can be $648 390, in case of 5th and 4th categories of hurricanes. We would like to give an advice to Joe Martinez, to buy standard and wind coverage insurance for $13 000, and he should think about
In, The economic way of thinking, by Peter Boettke, Paul Heyne, and David Prychitko, (2014) the authors explain the effects of gouging and price spikes on the economy, specifically focusing on the effects they have on a community during a declared disaster. Gouging and price spikes appall and outrage many people because they often occur at the time of disasters. Prices for items needed the most at that given time are drastically increased. Leaving many people questioning how the government could let the rising prices occur. Especially after what happen during the time of hurricane Katrina in August 2005 when plywood prices had risen even before the storm hit the Gulf Coast. As the prices rose not only in that area of the disaster but all over in other parts of the world as the demand was increased. As a result of past experiences with disaster one poses a question, Should people be upset at how the economy responses to disasters? After reflecting on the economist view point and analyzing the importance’s the market plays this student favors letting the market process for