"Howard Kunreuther, co-director of the Risk Management and Decision Processes Center and a professor at the Wharton School of the University of Pennsylvania" considers Who Will Pay for the Next Hurricane? in the NYTimes on Saturday:
.... a much broader problem: how this country can reduce future losses from natural disasters and aid victims in their recovery efforts. Because of increasing development in hazard-prone areas and the effects of climate change, we are in a new era of catastrophic losses from natural disasters. Ten of the 20 most costly natural disasters have occurred during the past five years — all 10 of them hurricanes, typhoons or tropical storms.
We need a new approach to financing the costs of natural disasters and to encouraging individuals in hazard-prone areas to undertake mitigation measures. Two principles, which appear to conflict with each other, are guiding a large-scale research study being undertaken by the Wharton Risk Center in conjunction with Georgia State University and the Insurance Information Institute (as well as with firms and organizations from the public and private sectors, some of whom pay for this research).
Principle 1: Risk-Based Premiums. Insurance premiums should be based on risk to encourage individuals to reduce their vulnerability to catastrophes.
Principle 2: Dealing With Equity and Affordability Issues. Any special treatment given to lower-income residents in hazard-prone areas should come from general public funding and not through artificially low rates.
Principle 1 means that insurance premiums should be higher at the coast than inland so that households have more incentive to live in less hazard-prone areas. Principle 2 acknowledges the fact that all high hazard areas are desirable. Flood plain housing is often cheap which attracts low-income residents. Principle 1 will mitigate this somewhat but we might still expect some housing in these areas. So, Principle 2 seems to be a compromise ... let's fix the insurance market first and work on equity out of the overall budget. This compromise is consistent with the idea that we ought to attack income distribution issues directly and not indirectly with environmental and other types of policy.
