Document Type

Article

Publication Date

2015

Abstract

Catastrophes from severe weather are perhaps the costliest accidents humanity faces. While we are still a long way from technologies that would abate the destructive force of storms, there is much we can do to reduce their effect. True, we cannot regulate the weather, but through smart governance and correct incentives we can influence human exposure to the risk of bad weather. We may not be able to control wind or storm surge, but we can prompt people to build sturdier homes with stronger roofs far from floodplains. We call these catastrophes "natural disasters," but they are the result of a combination of natural forces and, we show here, often imprudent and shortsighted human decisions induced by questionable government policies. Regulating weather risk is an increasingly urgent social issue. Hurricane Katrina in 2005 and Hurricane Sandy in 2012 brought unprecedented property damage to the Gulf and coastal northeastern states. As a result of an enormous development enterprise, the majority of Florida real estate now lies in coastal areas affected by hurricane activity. And the potential rise of sea level and the resulting erosion of the coastline are putting at risk large chunks of prime real estate in numerous regions. Our thesis is simple: the most effective way to prepare for storms is through disaster insurance. But this preparation would not simply take the form that is commonly thought: insurance as a form of post-disaster relief. Rather, we see insurance as a form of private regulation of safety - a contractual device controlling and incentivizing behavior prior to the occurence of losses.


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