Protecting against disaster risks: Why insurance and prevention may be complements

Wouter Botzen, Howard Kunreuther () and Erwann Michel-Kerjan ()
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Howard Kunreuther: University of Pennsylvania
Erwann Michel-Kerjan: University of Pennsylvania

Journal of Risk and Uncertainty, 2019, vol. 59, issue 2, No 2, 169 pages

Abstract: Abstract We examine mechanisms as to why insurance and individual risk reduction activities are complements instead of substitutes. We use data on flood risk reduction activities and flood insurance purchases by surveying more than 1000 homeowners in New York City after they experienced Hurricane Sandy. Insurance is a complement to loss reduction measures undertaken well before the threat of suffering a loss, which is the opposite of a moral hazard effect of insurance coverage. In contrast, insurance acts as a substitute for emergency preparedness measures that can be taken when a loss is imminent, which implies that financial incentives or regulations are needed to encourage insured people to take these measures. We find that mechanisms leading to preferred risk selection are related to past flood damage and a crowding out effect of federal disaster assistance as well as behavioral motivations to reduce risk.

Keywords: Adverse selection; Charity hazard; Decision making under risk; Flood insurance; Moral hazard; Risk perception (search for similar items in EconPapers)
JEL-codes: Q54 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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DOI: 10.1007/s11166-019-09312-6

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