Implied Preference for Seismic Design Level and Earthquake Insurance

K. Goda and H. P. Hong

Risk Analysis, 2008, vol. 28, issue 2, 523-537

Abstract: Seismic risk can be reduced by implementing newly developed seismic provisions in design codes. Furthermore, financial protection or enhanced utility and happiness for stakeholders could be gained through the purchase of earthquake insurance. If this is not so, there would be no market for such insurance. However, perceived benefit associated with insurance is not universally shared by stakeholders partly due to their diverse risk attitudes. This study investigates the implied seismic design preference with insurance options for decisionmakers of bounded rationality whose preferences could be adequately represented by the cumulative prospect theory (CPT). The investigation is focused on assessing the sensitivity of the implied seismic design preference with insurance options to model parameters of the CPT and to fair and unfair insurance arrangements. Numerical results suggest that human cognitive limitation and risk perception can affect the implied seismic design preference by the CPT significantly. The mandatory purchase of fair insurance will lead the implied seismic design preference to the optimum design level that is dictated by the minimum expected lifecycle cost rule. Unfair insurance decreases the expected gain as well as its associated variability, which is preferred by risk‐averse decisionmakers. The obtained results of the implied preference for the combination of the seismic design level and insurance option suggest that property owners, financial institutions, and municipalities can take advantage of affordable insurance to establish successful seismic risk management strategies.

Date: 2008
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https://doi.org/10.1111/j.1539-6924.2008.01037.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:riskan:v:28:y:2008:i:2:p:523-537

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