Abstract

This paper examines the role that insurance and mitigation can play in reducing losses from natural disasters using data collected as part of a large-scale study on catastrophic risk jointly undertaken by the Wharton Risk Management Center in conjunction with Georgia State University and the Insurance Information Institute. The paper graphically demonstrates why disaster losses have increased in the past twenty-five years and the magnitude of the problem today. It then shows how mitigation measures can reduce future losses using data on residential homes from four states facing severe risks from hurricanes. Insurance premiums can be used to incentivize homeowners to invest in protective measures if disaster coverage programs adhere to a set of guiding principles. The paper proposes long-term insurance as a way of reducing losses from future disasters and addressing concerns facing insurers and homeowners in hazard-prone areas.