Moral Hazard in Natural Disaster Insurance Markets: Empirical Evidence from Germany and the United States

Hudson, Paul; Botzen, Wouter; Czajkowski, Jeffrey; Kreibich, Heidi

doi:10.3368/le.93.2.179

Cited by 78 publications

(90 citation statements)

References 75 publications

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“…The members aim to find other solutions to flood risk beyond insurance and indeed we find significant correlations between insurance and the other measures of between 0.3 and 0.7. These findings have been confirmed by other studies (Hudson et al 2015, Lindell and Hwang 2008). However, there may also be an exchange in the groups regarding the most appropriate insurance cover, which was also confirmed by the groups themselves, which may result in a more comprehensive cover for members.…”

Section: Flood Action Groupssupporting

confidence: 82%

The impact of flood action groups on the uptake of flood management measures

et al. 2016

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Household flood management measures can significantly reduce the risk from flooding. Understanding the factors that influence the uptake of measures has important implications for the design of measures to induce people to take charge of risk mitigation. We investigate the impact of flood action groups in communities in Scotland on the uptake of four measures: insurance, flood warnings, sandbags and floodgates applying regression analysis using a cross-sectional survey (n = 124). The groups were formed in response to the threat from flooding in those communities, and offer information and training on household flood management measures. We use the theoretical framework of Protection Motivation Theory, and compare uptake of the measures before and after the foundation of the flood action groups, as well as in the near future. The models show positive adoption effects for flood warnings, floodgates and to an extent for insurance, and a positive correlation with increased confidence of implementing and belief in the effectiveness of the measures. The effect is significant if specific information on the measures was provided, indicating the importance of Climatic Change (2016)

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Section: Flood Action Groupssupporting

confidence: 82%

The impact of flood action groups on the uptake of flood management measures

et al. 2016

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“…Moral hazards have been observed in a broad range of insurance markets such as automobile, long-term care, and health [18]. A limited number of empirical studies that have been conducted in the domain of natural disaster insurance market however find little evidence for the presence of moral hazards [19]. Instead, they find that insurance purchases can increase the tendency towards self-protection against flooding across insured individuals [19][20][21][22].…”

Section: Introductionmentioning

confidence: 99%

Predicting support for flood mitigation based on flood insurance purchase behavior

Shao

Feng

Lin

2019

Environ. Res. Lett.

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What is the decision-making mechanism people rely upon to mitigate flood risk? Applying Bayesian Network modeling to a comprehensive survey dataset for the US Gulf Coast, we find that the overall support for flood mitigation can be inferred from flood insurance purchase behavior (i.e. without insurance versus with insurance purchased mandatorily, voluntarily, or both). Therefore, we propose a theoretical decision-making mechanism composed of two dimensions including informed flood risk and sense of insecurity. The informed flood risk is the primary determinant on one's overall support for flood mitigation. Risk mitigation decisions are largely contingent on the level of risk that is effectively conveyed to individuals. Additionally, sense of insecurity plays a moderate role in determining individuals' overall support for flood mitigation. The sense of insecurity can move people toward overall support for mitigation, but the effect is not as large as the informed risk. Results of this study have fundamental policy implications. The flood risk informed by Federal Emergency Management Agency's flood maps not only provides the compulsory basis for flood insurance purchase but also determines individuals' overall support for flood mitigation. Flood map inaccuracy can immensely mislead individuals' overall risk mitigation decision. Meanwhile, this flood risk mitigation decision-making mechanism inferred from a survey data in the US Gulf Coast needs to be tested and validated elsewhere.

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“…Public authorities can observe that the cost of flood premiums does not prevent a great number of householders from purchasing flood coverage, despite householders complaining about the growing costs of premiums particularly after a major disaster. As for insurance firms, they find in this model evidence that support their concern over adverse selection and moral hazard (Hudson et al 2014). By being able to match flood risks with the cost of premiums, as Kunreuther (2008) advocate, insurance firms reduce their risk of insuring for lower prices householders that present higher risks and repetitive losses.…”

mentioning

confidence: 74%

“…Respondents that estimate higher losses to major floods are more likely to take out flood insurance. This intuitive finding is also relevant in terms of revealing that risk aversion is also an important factor to be consider when assessing decision making under uncertain scenarios (Hudson et al 2014;Petrolia et al 2013;Poussin et al 2014).…”

mentioning

confidence: 80%

Individual Risk Perception and Flood Mitigation: An Empirical Study of Protective Actions in Australia

Uehara¹

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The Australian government has increasingly expected that individuals collaborate with public efforts to reduce hazard risks by taking some action themselves. This expectation, however, has failed to consider the complexity of the decision-making process at the household level.Individual decision making is rather complex as it involves a wide range of factors that should be taken into account before the government can assess to what extent individuals at risk can effectively contribute to the reduction of hazard risks. This is where a theoretical framework makes a contribution to this thesis by guiding data collection and analysis. Thus this thesis resorts to a comprehensive socio-psychological theory to generate empirical data on the different factors affecting decision making under uncertainty.The testing of this comprehensive theoretical framework called Protection Motivation Theory focuses on the explanatory variables of risk perception ('threat appraisal') and coping measures ('coping appraisal'). Threat appraisal factors have to do with the perception of hazard risks and coping appraisal variables measure the perceived ability of an individual to take action. The novelties of this study are i) the application of this theoretical framework, which has already been tested in order countries, for the first time in Australia, more specifically among householders living in flood-prone locations in Southeast Queensland; ii) a dataset featuring significant variability in terms of vulnerability and exposure levels of the population at risk; iii) the assessment of how heuristics and biases affect decision making under uncertainty; and iv) qualitative data to unpack non-intuitive associations and understand the role that the nature of threats and protective actions play in the decisions of householders to take protective actions. An interesting finding from previous studies is that coping factors are better predictors for protective actions than risk perception. This thesis then will verify whether this association is also observed in the Australian context. However, emerging from this study, is the argument that individuals at risk living in this region make decisions which do factor in their hazard risk perceptions and their perceived capacity to take action; however, this decision-making process also take into account the vulnerability conditions of the population at risk. Also, qualitative data suggest that exposure to hazard risks shaped by the nature of the threat and the characteristics of the protective action also play a role in the decision of householders to take preventive measures that reduce or eliminate flood damage. The findings on how these conditions and circumstances influence decisions made under uncertain scenarios are the main contribution of this thesis to the literature. 3This contribution, however, is not only relevant within the academic community. If Australian authorities are to enhance the resilience of communities at risk to potential damage caused by hazards, it needs first to ha...

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Moral Hazard in Natural Disaster Insurance Markets: Empirical Evidence from Germany and the United States

Cited by 78 publications

References 75 publications

The impact of flood action groups on the uptake of flood management measures

The impact of flood action groups on the uptake of flood management measures

Predicting support for flood mitigation based on flood insurance purchase behavior

Individual Risk Perception and Flood Mitigation: An Empirical Study of Protective Actions in Australia

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