Insurance for catastrophes: Why are natural hazards underinsured, and does it matter?

Abstract

This chapter describes the state of our knowledge about the impacts of disaster insurance. To narrow our discussion, we concentrate on agricultural insurance (for droughts and floods) and earthquake insurance (for buildings and infrastructure) and describe the current state of these two markets globally. We then briefly discuss the more commonly investigated puzzles about the demand and supply of insurance in these domains. Potential purchasers of insurance (households, commercial firms, infrastructure owners, local and central governments) appear to undervalue catastrophic insurance and thus the demand for insurance is typically below what standard economic models with risk averse agents would predict. Equally, the supply of insurance contracts also appears to be limited in both of these markets. Both of these puzzles have been surveyed before. Our main focus is to describe the more sparse literature about the impacts of having these insurance covers. We ask how the presence of insurance may change the ways the insured assess risk, and how its presence changes outcomes following catastrophic events. We end with some directions for future research on the impacts of disaster insurance.