Protecting Against Disaster Risks: Why Insurance and Prevention May Be Complements
We examine mechanisms as to why insurance and individual risk reduction activities are complements instead of substitutes. Using data on individuals’ flood preparedness activities we find that mechanisms leading to preferred risk selection are related to flood damage experienced in the past and a crowding out effect of federal disaster assistance as well as behavioral motivations to reduce risk. Insurance is a complement to loss reduction measures undertaken well before the threat of suffering a loss, while insurance acts as a substitute for damage mitigation measures that can be purchased when a loss is imminent.
W. J. Wouter, Botzen; Howard, Kunreuther; Erwann, Michel-Kerjan
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