The Changing Societal Consequences of Risks from Natural Hazards

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Abstract
In recent years, the federal government has pro vided substantial relief to victims of natural disasters. A pri mary reason for this assistance is that many of the individuals suffering damage have not protected themselves with insur ance. Standard coverage, normally required as a condition for a mortgage, offers protection against fire, wind, and hail damage; flood and earthquake policies can be purchased sep arately, and most residents of hazard-prone areas have not voluntarily bought this coverage. Recent empirical evidence on individuals' decision processes with respect to protection against events which have a relatively small chance of oc curring but can result in severe losses is summarized. Unless individuals have been made graphically aware of the conse quences of disasters, typically through past experience, they are unlikely to even consider purchasing insurance protec tion. Once their interest is stimulated they use informal net works such as friends and neighbors to guide them in their actions. Tradeoffs between using voluntary means of promot ing insurance or some other form of required coverage are discussed. Policy decisions have to reflect both the decision processes of individuals as well as value judgments on the appropriate role of the private and public sectors in natural disasters.

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