Friday, January 18, 2013

Insure better against natural disasters

When Hurricane Sandy hit the East coast of the US, relatively few people died, there was considerable damage, but no long term consequences of significance are expected. The story is different with Hurricane Katrina, which inflicted damage of a similar order of magnitude but New Orleans and its surroundings are still feeling the hit. Look at similar weather events in developing countries and the recovery takes even longer, if ever. This should not have to do with the number of victims, as there is some evidence that sudden population drops actually improve conditions for the survivors.

Goetz von Peter, Sebastian von Dahlen and Sweta Saxena use data on natural catastrophes from a large reinsurance company and find that what matters for subsequent macroeconomic performance is not the cost of the damage, but the cost of the uninsured damage. It just so happens that the proportion of insured property increases with development. Yet another argument to encourage adoption of insurance policies in developing economies (I, II III, IV).

2 comments:

Joseph Kaupp said...

What do you think about doing away with government subsidies for insurance premiums on homes in flood prone areas? While this could be a good way to disincentivize home purchases in disaster prone areas, it might--in many cases--broach the question of economic inequality.

Economic Logician said...

I agree that insurance that is heavily subsidized like the one you describe is wrong. You do not want insurance to encourage dangerous behavior too much).