NSF PR 97-38 - May 19, 1997
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U.S. Still Plagued by Low Rates of Disaster Insurance
Coverage
Researchers say that their findings in a 1978 landmark
National Science Foundation (NSF)-funded study of
risky behavior still holds true nearly two decades
later -- most people are reluctant to purchase insurance
against natural disasters because they believe such
events will not happen to them.
Logical factors, such as the cost of insurance and
perceived likelihood of disaster, don't count for
much in most people's decisions, according to Howard
Kunreuther, who conducted the seminal study, and who
continues to examine what prompts people to insure
- or not - against floods, earthquakes, hurricanes
and other natural hazards.
Following a severe flood or earthquake, for example,
residents often show keen interest in purchasing insurance
- even though they know that it comes too late to
provide financial relief from the recent disaster.
And often, persons cancel these policies after several
years of not experiencing mishaps.
Kunreuther and fellow researchers Paul Kleindorfer
and Neil Doherty, economists at the University of
Pennsylvania's Wharton School, say that government,
insurers, financial institutions, the real estate
trade and property owners each have a place and role
- like "a nested, interconnected layer cake" - to
minimize the chance of property damage.
The researchers found property owners ill-informed
about the real risks of disaster and about the limited
government help they should expect to help recoup
their losses. Some homeowners forego buying insurance,
unless required as a condition for a mortgage, because
they assume that they can depend on federal and state
aid in the form of grants for rebuilding. In reality,
the bulk of government disaster assistance comes as
low-interest loans.
In coastal areas where the worst hurricanes often
strike, regulatory restrictions often keep insurance
premiums lower than they would be if rates were based
on risk. As a result, insurers are not eager to sell
coverage to these property owners. A current NSF-funded
study by the Wharton School researchers is now using
some of the latest geological and meteorological information
and new micromodeling techniques to determine the
impact that disasters of various magnitudes will have
on specific cities.
The research team also is looking at the effect of
different safety improvements on future property losses.
New, stricter building codes, which could greatly
minimize property damage, are not uniformly instituted
or enforced. "There is a need to determine which mitigation
measures are likely to be cost-effective and then
develop economic incentives for property owners to
adopt them," notes Kunreuther.
The Wharton School's Risk Management and Decision
Processes Center is continuing to cooperate with many
major property insurers worldwide, with support from
NSF's directorates for Engineering and Social, Behavioral
and Economic Sciences. The Wharton center tries to
understand reactions to low probability, high consequence
events and provides advice to consumer groups and
policy recommendations to all levels of business and
government.
"The lessons learned from the research done at Wharton
and elsewhere are clear," says William A. Anderson,
director of NSF's hazard mitigation research section.
"On the one hand, institutions and individuals need
better information on the real likelihood of disasters
and their associated costs. On the other hand, better
information alone may not help; we need to pay attention
to the vast amount of research conducted on how people
and institutions actually make decisions under risk
and actually use available information in this process."
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