Protecting against disaster risks: Why insurance and prevention may be complements

W. J.Wouter Botzen*, Howard Kunreuther, Erwann Michel-Kerjan

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We examine mechanisms as to why insurance and individual risk reduction activities are complements instead of substitutes. We use data on flood risk reduction activities and flood insurance purchases by surveying more than 1000 homeowners in New York City after they experienced Hurricane Sandy. Insurance is a complement to loss reduction measures undertaken well before the threat of suffering a loss, which is the opposite of a moral hazard effect of insurance coverage. In contrast, insurance acts as a substitute for emergency preparedness measures that can be taken when a loss is imminent, which implies that financial incentives or regulations are needed to encourage insured people to take these measures. We find that mechanisms leading to preferred risk selection are related to past flood damage and a crowding out effect of federal disaster assistance as well as behavioral motivations to reduce risk.

Original languageEnglish
Pages (from-to)151-169
Number of pages19
JournalJournal of Risk and Uncertainty
Volume59
Issue number2
DOIs
Publication statusPublished - 12 Nov 2019

Keywords

  • Adverse selection
  • Charity hazard
  • Decision making under risk
  • Flood insurance
  • Moral hazard
  • Risk perception

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