Managing catastrophic risks through redesigned insurance: Challenges and opportunities

Abstract

Catastrophic risks associated with natural disasters have been increasing in many countries including the United States because more individuals and firms have located in harm's way while not taking appropriate protective measures. This chapter addresses ways to reduce future losses by first focusing on behavioral biases that lead homeowners and decision-makers not to invest in adequate protection. It then turns to developing proposals for risk management strategies that involve private-public partnerships. These include multiyear insurance contracts with risk-based premiums coupled with mitigation loans and insurance vouchers to address affordability concerns for low- income homeowners, tax incentives, well-enforced building codes and land-use regulations.