The complementary roles of mitigation and insurance in managing catastrophic risks

This paper examines the impact that insurance coupled with specific risk mi tigation measures (RMMs) could have on reducing losses from hurricanes and earthquakes as well as improving the solvency position of insurers who prov ide coverage against these hazards. We first explore why relatively few ind ividuals adopt cost-effective RMMs by reporting on the results of empirical studies and controlled laboratory studies. We then investigate the impact that an RMM has on both the expected losses and those from a worst case sce nario in two model cities-Oakland (an earthquake-prone area) and Miami/Dade County (a hurricane-prone area) which were constructed respectively with t he assistance of two modeling firms. The paper then explores three programs for forging a meaningful public-private sector partnership: well-enforced building codes, insurance premium reductions linked with long-term loans, a nd lower deductibles on insurance policies tied to mitigation. We conclude by briefly examining four issues for future research on linking mitigation with insurance.