In Case Of Emergency, Read Blog

With Hurricane Bill gathering steam in the Atlantic, I wanted to highlight a new book, At War With The Weather: Managing Large-Scale Risks in a New Era of Catastrophies (MIT Press) by Howard C. Kanreuther and Erwann O. Michel-Kerjan. The authors, professors at the Wharton School of Business at the University of Pennsylvania, look at how the nation does (and doesn’t) mitigate, insure against, and finance recovery from natural disasters. Then, the book offers some interesting ideas on reducing losses and providing financial support for disaster victims to help recover from future large-scale events.

In 2005, Kanreuther and Michel-Kerjan point out, three major hurricanes — Katrina, Rita, and Wilma — hit the U.S. Gulf Coast within an eight-week period resulting in insurance reimbursements and federal disaster relief of more than $180 billion. Today, the book notes, we are more vulnerable to catastrophic losses because of the increasing concentration of population and activities in high-risk coastal regions of the country. It is a point frequently made by emergency officials, including FEMA Administrator Craig Fugate who, noting the proliferation of golf course developments in his native state, remarked recently that “you can tee off in Tallahassee and play through to Pensacola”.

But how should the nation (and states and localities) deal with this issue? In the book, the authors offer two overall principles that ”provide guidelines for the development of new catastrophe insurance programs”:

Principle 1: Premiums reflecting risk are designed to provide signals to individuals regarding the hazards they face and encourage the adoption of cost-effective mitigation measures. Principle 2: Dealing with equity and affordability issues addresses ways to provide special treatment to homeowners currently residing in hazard-prone areas (e.g. low-income uninsured or inadequately insured homeowners).

Then, based on the above principles the authors offer two proposals to provide protection for homeowners in hazard-prone areas:

1) Long-term homeowners’ insurance could be tied to a mortgage, thus stabilizing a homeowner’s premiums over time. Home improvements loans can encourage the adoption of cost-effective loss-reduction measures. 2) A program of insurance vouchers, similar in concept to food stamps, could assist low-income residents in disaster-prone areas so they can purchase adequate insurance.

Anyone interested in the issues around hurricane/disaster preparedness and response will find At War With The Weather definitely worth reading.