The implications of national catastrophe financing policies for households

Claudia Seibold describes and compares government strategies in ten countries which differ with respect to the existence of catastrophe funds and public and private insurance.

C. Seibold

C. Seibold

Introduction

Natural disasters cause serious economic losses that have the potential to affect not only the insurance and public sector but especially private individuals. In the last years, single natural hazards caused multi-billion dollar economic losses: the tsunami in Japan ($210 bn in 2011), the storm Katrina in the USA ($125bn in 2005), and the earthquake in China ($85bn in 2008). These yearly economic losses are expected to increase with growing cities, increasing infrastructure development, and climate change.

This research describes and compares strategies of the governments in Austria, France, Germany, Netherlands, New Zealand, Norway, Spain, Switzerland, Turkey, and USA. These polices differ with respect to the existence of catastrophe funds and public and private insurance. The accessibility and the details influence both pre-disaster risk management and post-disaster compensation schemes. This research focuses particularly on the consequences of different strategies on households.

Methodology

Based on a desktop survey of different national parameters for disaster management in the selected countries, national strategies are compared with respect to how losses are absorbed by the state or individuals. Details of these policies are analyzed in terms of who imposes the losses on society, for example, by locating the household in a hazardous area, and who pays to mitigate the risk, for example, for relocating the property out of the hazard zone. In this way, disaster policy can be analyzed from the view of the Coase theorem. Post-disaster compensation schemes are compared for four different amount of damage. The damage range from small (€1,000), medium (€10,000), up to high damages (€100,000 and 500,000).

Results

The policy terrain is wide. It ranges from very hierarchical strategies such as in the Netherlands with government compensation, to policies focusing on the individual responsibility such as Germany with a purely commercial solution, and it also includes programs rewarding communities complying with national floodplain management requirements such as the USA.

The parameters are often a mix, for example, with flat-rate premiums providing cross subsidies and deductibles placing responsibility for a layer of risk on the household. The financial burden households have to bear after a natural disaster ranges from 0 to 100% depending on the size of the damage and the governmental policy.

There is no single best case but countries with a mix of strategies such as governmental control of first-loss damages, individual responsibility for taking insurance, and involvement of communities to reduce the risk may have the potential to be the most successful on the long term.

Note

Claudia Seibold, of the University of Canterbury, Christchurch, New Zealand, is a German citizen. She was funded by IIASA's German National member Organization and worked in the Risk, Poverty and Vulnerability (RPV) Program while with the YSSP.

Please note these Proceedings have received limited or no review from supervisors and IIASA program directors, and the views and results expressed therein do not necessarily represent IIASA, its National Member Organizations, or other organizations supporting the work.


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Last edited: 19 August 2015

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