U.S. Still Plagued By Low Rates Of Disaster Insurance Coverage

May 19, 1997

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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National Science Foundation

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