An official website of the United States government
Abstract We develop a computational framework for the stochastic and dynamic modeling of regional natural catastrophe losses with an insurance industry to support government decision‐making for hurricane risk management. The analysis captures the temporal changes in the building inventory due to the acquisition (buyouts) of high‐risk properties and the vulnerability of the building stock due to retrofit mitigation decisions. The system is comprised of a set of interacting models to (1) simulate hazard events; (2) estimate regional hurricane‐induced losses from each hazard event based on an evolving building inventory; (3) capture acquisition offer acceptance, retrofit implementation, and insurance purchase behaviors of homeowners; and (4) represent an insurance market sensitive to demand with strategically interrelated primary insurers. This framework is linked to a simulation‐optimization model to optimize decision‐making by a government entity whose objective is to minimize region‐wide hurricane losses. We examine the effect of different policies on homeowner mitigation, insurance take‐up rate, insurer profit, and solvency in a case study using data for eastern North Carolina. Our findings indicate that an approach that coordinates insurance, retrofits, and acquisition of high‐risk properties effectively reduces total (uninsured and insured) losses.
more »
« less
Insurability and government-funded mitigation: safer but costlier
Abstract Hurricanes significantly harm homeowners through physical damage and long-term financial strain due to rising insurance costs, property value loss, and repair expenses. This paper focuses on the interrelated decisions of the government mitigation funding of residential acquisitions and retrofit subsidies and of price restrictions on the insurance market in eastern North Carolina to determine the financial effects on stakeholders. The introduction of these policy interventions have impacts that propagate through the system due to risk adjustments, homeowner take-up behaviour, and insurer profit-maximising behaviour. This study uses an integrated game theoretic model to demonstrate that there are cost-effective government spending levels that reduce residential loss from hurricane damage. When insurance prices are capped at preintervention levels, the number of households and their distribution of losses, which has been altered through mitigation, leads to increased insurer insolvency. When insurance prices are allowed to adjust after mitigation, some homeowners find insurance is no longer affordable. This highlights the tradeoff between ensuring insurer stability and expanding homeowner insurance accessibility.
more »
« less
- Award ID(s):
- 2209190
- PAR ID:
- 10556915
- Publisher / Repository:
- DOI PREFIX: 10.1057
- Date Published:
- Journal Name:
- The Geneva Papers on Risk and Insurance - Issues and Practice
- Volume:
- 50
- Issue:
- 2
- ISSN:
- 1018-5895
- Format(s):
- Medium: X Size: p. 365-380
- Size(s):
- p. 365-380
- Sponsoring Org:
- National Science Foundation
More Like this
-
-
We study the problem of designing cyber insurance policies in an interdependent network, where the loss of one agent (a primary party) depends not only on his own effort, but also on the investments and efforts of others (third parties) in the same eco-system (i.e., externalities). In designing cyber insurance policies, the conventional wisdom is to avoid insuring dependent parties for two reasons. First, simultaneous loss incidents threaten the insurer's business and capital. Second, when a loss incident can be attributed to a third party, the insurer of the primary party can get compensation from the insurer of the third party in order to reduce its own risk exposure. In this work, we analyze an interdependent network model in order to understand whether an insurer should avoid or embrace risks interdependencies. We focus on two interdependent agents, where the risk of one agent (primary party) depends on the other agent (third party), but not the other way around. We consider two potential scenarios: one in which an insurer only insures a primary party, and another one in which the insurer of the primary party further insures the third party agent. We show that it is in fact profitable for the primary party's insurer to insure both agents. Further, we show that insuring both agents not only provides higher profit for the insurer, but also reduces the collective risk.more » « less
-
This paper highlights how cyber risk dependencies can be taken into consideration when underwrit- ing cyber-insurance policies. This is done within the context of a base rate insurance policy framework, which is widely used in practice. Specifically, we show that there is an opportunity for an underwriter to better control the risk dependency and the risk spill-over, ultimately resulting in lower overall cyber risks across its portfolio. To do so, we consider a Service Provider (SP) and its customers as the interdependent insurer’s customers: a data breach suffered by the SP can cause business interruption to its customers. In underwriting both the SP and its customers, we show that the insurer can increase its profit by incentivizing the SP (through a discount on its premium) to invest more in security, thereby decreasing the chance of business interruption to the customers and increasing social welfare. For comparison, we also consider a scenario where the insurer underwrites only the SP’s customers (but not the SP), and receives compensation from the SP’s insurance carrier when losses are attributed to the SP. We show that the insurer cannot outperform the case where it underwrites both the SP and its customers. We use an actual cyber-insurance policy and claims data to calibrate and substantiate our analytical findings.more » « less
-
null (Ed.)Abstract We hypothesize that for disaster risk mitigation, many households, despite being aware of their risk and possible mitigation actions, never seriously consider doing anything about them. In mitigation-focused decisions, since there is no equivalent to warning messages, the decision process is likely to evolve over an extended time. We explore what activates hurricane mitigation protective action decisions through three research questions: (1) to what extent are homeowners unengaged in protective action decision making? (2) What homeowner characteristics are associated with lack of engagement? And (3) to what extent do different life events trigger engagement in the decision-making process? We use the Precaution Adoption Process Model to conceptualize engagement as distinct from decision making; the broader protective action decision-making literature to explore drivers of engagement; and Life Course Theory to examine potential transitions from unengaged to engaged. We use survey data of homeowners in North Carolina to examine these questions empirically. Findings suggest that one-third of respondents had never engaged in protective action decisions, that life experiences differ in their occurrence frequency and effect on households’ mitigation decisions, and that some events, such as renovating, reroofing, or purchasing a home may offer critical moments that could be leveraged to encourage greater engagement in mitigation decision making.more » « less
-
After a disaster, homeowners’ rebuilding decisions can reshape the built environment to mitigate hazards and global climate effects. In this study, we explore homeowners’ rebuilding priorities of fire resilience and sustainability, and what influences these priorities. We base this exploration on surveys conducted with over 300 homeowners rebuilding after the 2021 Marshall Fire near Boulder, Colorado. To determine what supports and inhibits the adoption of household sustainability and fire resilience measures for homes, we statistically analyzed survey data on homeowner rebuilding priorities and factors influencing the rebuilding priorities of sustainability and fire resilience. We found that homeowners prioritized cost the most, followed by aesthetics and sustainability, with fire resilience also highly prioritized; those that prioritized sustainability also prioritized fire resilience. However, financial factors did not significantly predict the prioritization of sustainability and fire resilience. We also found that beliefs about climate change and political ideology predicted the prioritization of sustainability, and support for fire resilience policy predicted the prioritization of fire resilience. These results suggest that homeowners consider the priorities of fire resilience and sustainability as related and indicate synergies that could be exploited if the most highly prioritized rebuilding priorities are combined.more » « less
