Financing Future Catastrophes

Hurricane Sandy: Seaside Heights, NJ. 31 October 2012. Credit EPA

I read an interesting analysis of the current state of play with regard to financing disasters in the New York Times Opinion pages recently.

The authors, Erwann Michel-Kerjan and Howard Kunreuther, are researchers at the Wharton School of the University of Pennsylvania – which is a member of the Willis Research Network.

In the NYT op-ed, Michel-Kerjan and Kunreuther explain that the incidence of extreme natural disasters is becoming more frequent. This is most likely due to the location in high-risk areas of more people and more valuable property along with the effects of climate change, they say. Because of the quickening pace of disaster those in high-risk areas are forced to pay higher prices for insurance.

So with that in mind, Michel-Kerjan and Kunreuther offer some proposals for how we might pay for these disasters in the future. One option, as the authors explain, is government (or State) funded pools that can offer coverage at lower premiums than the private market.

The thing about these regional or country wide programs, however, is that those living in non-risky areas subsidize people in disaster prone areas. And taxpayers often have to bail out the funds when a large (and costly) catastrophe strikes.

This “status-quo” is unacceptable, say Michel-Kerjan and Kunreuther. A more “coherent strategy” is needed. Premiums should reflect risk, they say. Their proposal is that people living in hazard prone areas who cannot afford insurance should receive assistance in the form of a “means tested voucher program similar to the food stamp program.”

 

About Alice Underwood

Alice Underwood is an Executive Vice President with Willis Re and leads the Analytics team for Willis Re North Amer…
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