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Disaster Insurance Coverage Remains Low

September 1997

Few people expect to be directly affected by a hurricane, tornado or flood. And therefore, only a few people buy insurance. These are the findings of an NSF-funded study of risky behavior, a follow-up to a 1978 study that found virtually the same thing.

Logical factors, such as the cost of insurance and perceived likelihood of disaster, don't count for much in most people's decisions, according to Howard Kunreuther of the Wharton School of Business at the University of Pennsylvania. Kunreuther conducted the study and continues to examine what prompts people to insure--or not.

Kunreuther found that following a severe flood or earthquake, residents often show keen interest in purchasing insurance, even though they know it comes too late to provide financial relief from the recent disaster. Often, persons cancel these policies after several years of not experiencing another disaster.

Kunreuther and his colleagues Paul Kleindorfer and Neil Doherty say that the government, insurers, financial institutions, the real estate industry and property owners each have a role in minimizing the chance of property damage. In general, the researchers found property owners ill-informed about the real risks of disaster and about the limited government assistance they should expect.

"The lessons learned from the research done at Wharton and elsewhere are clear," says William Anderson, director of NSF's Hazard Mitigation Research Section. "On the one hand, institutions and individuals need better information on the real likelihood of disasters and their associated costs. On the other hand, better information alone may not help; we need to pay attention to the research conducted on how people and institutions actually make decisions under risk and actually use available information in this process."

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