Chapter 11. Economics of Natural Catastrophe Risk Insurance

Economic and insured losses from natural catastrophes have increased significantly in recent years and are challenging the way catastrophe risk insurance markets operate today. This chapter focuses on how insurance in combination with other policy tools can reduce losses from natural disasters and provide funds to aid the recovery process following catastrophic events. To address this issue we discuss conditions of insurability and how insurers have behaved with respect to extreme events in the United States. We then examine the demand for homeowners insurance and why there is limited interest by many individuals in voluntarily purchasing and maintaining coverage against catastrophe losses. We introduce two guiding principles for insurance: Premiums should reflect risk and Dealing with equity and affordability issues , and discuss several options for providing coverage against large-scale risks that embrace these principles including offering fixed-price multi-year insurance contracts as a complement to annual policies.