Economics and the wind

No hurricanes in sight. Yet, it is still surprising that coastal households tend not to purchase storm mitigation for their homes. In a chapter in a book (with the above title) edited by Ewing, Rawls and Kruse [pause], my old UNCW buddies Rob Burrus, Chris Dumas and Ed Graham conduct a survey of coastal homeowners to determine their willingness to pay for storm mitigation. They find that:

Survey results indicate that increased insurance deductibles do increase the probability of structural mitigation purchases.

So, instead of dropping coastal homes from the list of insured, why don't insurance companies raise deductibles so that households will self-protect for the manageable damages. Then households'll still have insurance for the unmanageable damages. I'm sure there is some institutional barrier in there somewhere. Anyone? Anyone?

Further, in a paper in the Financial Services Review, Rob, Chris and Ed do some mathematical gymnastics and find that, at current prices, insurance is preferred to mitigation. Here is the abstract:

Many experts encourage homeowners to improve their houses to better survive natural catastrophes and reduce overall societal costs. However, we find that these encouragements are not necessarily financially sound for the homeowner at risk of hurricane wind damage. We find that subsidized insurance reduces the incentive for a risk-neutral homeowner to purchase structural mitigation, because mitigation does not generally reduce damages to below subsidized deductibles. If insurance premiums increase or if hurricane strike probabilities or market returns decrease, then the wealth-maximizing homeowner drops insurance and purchases mitigation. For homeowners to purchase both mitigation and insurance, high-deductible/low-premium insurance must be offered.

Here is the recent article that gave me the flashback to UNCW (Flood insurance rates may surge):

Thousands of coastal residents could see their flood insurance premiums rise this fall because North Carolina hasn't adopted the latest international building codes on wind-borne debris.

But the N.C. Building Code Council, a board dominated by development interests, said doing so could price many middle- and lower-income residents out of the housing market.

The problem, council members said, is that the international code would require every window in new homes as far inland as Burgaw and parts of Columbus County to be equipped with protective plywood panels, hurricane shutters or expensive shatter-resistant windows.

Currently, only new homes within 1,500 feet of the ocean shoreline must have the added safety features.

Developers claim applying the regulations to the 120 mph wind zone and even parts of the 110 mph zone could add thousands of dollars to the price of homes. The stronger windows, for example, cost at least 50 percent more than standard windows.

I wonder if, at higher prices, insurance will be preferred to mitigation?