Does Property Insurance Affect Disaster Mitigation?

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The recent flooding in the Midwest reminds us again of the tenuous relationship we share with nature. Living at the whim and idiosyncrasies of the weather may imply that we are merely victims but if you look close, we may be as much if not more to blame due to our locational choices. But do such natural disaster affect the way we purchase property insurance or vice versa? It reminded me of the chapter summaries I wrote for one of my classes last year. I am sharing one of them below:

Mitigation couple with insurance coverage should be considered as an appropriate measure of risk prevention instead of depending solely on insurance. FEMA defines mitigation as “sustained action taken to reduce or eliminate long-term risk to people and property from hazards and their effects.” However due to low frequency of natural hazards or skewed risk perceptions, homeowners are unlikely to indulge in mitigation efforts apart from buying property insurance. The spillover effects of personal losses during a large-scale natural disaster often transforms an otherwise personal and private loss into a social risk in form of homelessness, displacement, unemployment, and rise in cost of public services.

Such a transformation almost mandates government action in an otherwise private insurance market and government aims to incorporate mitigation measures instead of merely diverting public funds towards disaster relief. The private insurance industry has also realized the importance of better building codes and mitigation processes to avoid hazard risks. Thus, it is important not only for the government but also for the private insurers to develop models that link mitigation with insurance so as to provide greater reliability and reduced uncertainty to assess costs and losses for a natural disaster.

The government has attempted to pass several legislative acts in order to increase insurance coverage and promote mitigation. The HR 4480 initiated in 1990 attempted to protect private insurers by transferring the risk to the federal government. Senate Bill 1350 considered increasing the availability of disaster insurance and encourage hazard mitigation to reduce reliance on federal assistance.

But after deliberations in the House of Representatives and the Senate, it was clear that in order to have any federal control over disaster relief and insurance it would incorporate imposing sufficient hazard mitigation techniques and have federal oversight and control. It would also entail sharing risk with the private sector and make insurance purchase mandatory for federally related mortgages. But due to limited success in mandatory implementations of the national flood insurance requirements, these legislative actions met with limited success.

Hazard mitigation has to be implemented either through voluntary action or through enforcement of government regulations, ordinances, and codes at the local level. But such enforcement depends on the institutional capacity of the local government. It has to be clear in statues and regulations as to what actions governments are required to take and should specify relationships between different subdivisions of the government. The success of such a plan is dependant on the land management goals incorporated in the comprehensive plans and the previous experience with similar disasters.

Implementation of mitigation measures through insurance has lead to identification of 8 broad themes and 15 specific objectives. The building codes should be made broader in order to go beyond protecting just life of the occupants and should be implemented statewide instead of varying across different jurisdictions. More public education and research on retrofitting structures with disaster preventive measures should be emphasized.

Kunreuther’s six objectives that include more stringent building codes, seals of approval on structures meeting codes, insurance that encourages mitigation, all-hazard insurance provision, government reinsurance, and subsidies for low-income families seems to address the crucial aspects of the relationship between mitigation and insurance. Provision of financial incentives through reduced premiums and limited availability of insurance also might encourage wider acceptance.
References:

Kunreuther, Howard. “A Program for Reducing Disaster Losses Through Insurance” in Paying the Price, Howard Kunreuther and Richard Roth eds., 1998 National Academy of Sciences Press.