Modeling Insurer‐Homeowner Interactions in Managing Natural Disaster Risk

Abstract

The current system for managing natural disaster risk in the United States is problematic for both homeowners and insurers. Homeowners are often uninsured or underinsured against natural disaster losses, and typically do not invest in retrofits that can reduce losses. Insurers often do not want to insure against these losses, which are some of their biggest exposures and can cause an undesirably high chance of insolvency. There is a need to design an improved system that acknowledges the different perspectives of the stakeholders. In this article, we introduce a new modeling framework to help understand and manage the insurer's role in catastrophe risk management. The framework includes a new game-theoretic optimization model of insurer decisions that interacts with a utility-based homeowner decision model and is integrated with a regional catastrophe loss estimation model. Reinsurer and government roles are represented as bounds on the insurer-insured interactions. We demonstrate the model for a full-scale case study for hurricane risk to residential buildings in eastern North Carolina; present the results from the perspectives of all stakeholders-primary insurers, homeowners (insured and uninsured), and reinsurers; and examine the effect of key parameters on the results.

Measuring Heterogeneous Price Effects for Home Acquisition Programs in At‐Risk Regions

“…These findings can also be embedded in larger integrated models that include homeowners, insurers, reinsurance, and government as stakeholders. Similar integrated models have been used to study the effect on all stakeholders of a private voluntary market for catastrophe insurance, insurer competition, insurance affordability, and retrofit choices (Kesete et al ; Peng et al ; Gao et al ; Shan et al ; Jasour et al ; Xu et al ). This wider perspective would allow researchers to analyze the combined effects of acquisition, retrofit, and insurance actions on regional risk.…”

Homeowner purchase of insurance for hurricane-induced wind and flood damage

“…The societal benefit of wind and flood risk management through insurance and retrofit has been demonstrated in Kesete et al (2014), Peng et al (2014), and Gao et al (2016). It is imperative that we understand better the drivers that prompt insurance purchase and the structure of policy pricing that homeowners find most attractive.…”

“…In particular, this paper focuses on: (1) developing statistical models that can be used to predict insurance penetration rates for a region under different premium levels, (2) understanding the influence of certain factors on homeowner insurance purchasing decisions-in particular, premium, deductible, previous hazard experience, risk, and previous retrofit actions, and (3) comparing the insurance purchasing decisions for flood and wind perils. Models that could be used in a predictive mode for a region can be helpful in and of themselves to assess the likely effect of rate changes and/or within a larger framework modeling the larger insurer-homeowner system of managing natural disaster risk (e.g., Peng et al 2014;Kesete et al 2014). Comparison of models for flood and wind perils can help determine if the research findings based on the flood peril are likely to apply to wind as well.…”

Planning Emergency Shelters for Urban Disasters: A Multi-Level Location–Allocation Modeling Approach

“…It is an important stage of disaster management [6], and the scientific nature rationality of emergency shelter's location directly affects the success or failure of rescue work. Admittedly, besides evacuation, mitigation against natural disasters by retrofitting and purchasing insurance policies is also an important strategy [28][29][30], and the coordination of different stakeholders in disaster management investments is critical for the social welfare [31]. In these aspects, we will conduct an in-depth analysis in future research, and propose corresponding countermeasures for the better implementation and construction of emergency shelter planning.…”