Reducing Expected Hurricane Damages: A Microeconomic Perspective

Homeowners mitigate potential hurricane losses by purchasing insurance and structural improvements. We construct and parameterize a model of optimal homeowner choice for a representative property in Wilmington, N.C., a hurricane prone region. Given existing insurance policies, National Weather Service location-specific hurricane strike probabilities, structural improvement costs, and an existing building code, our model simulations show that insurance is a substitute for structural mitigation. These simulation results hold under higher storm strike probabilities, higher insurance premiums, risk-neutrality, and risk-aversion. The findings are consistent with recent hedonic pricing model results for coastal island properties that find a substitute relationship between insurance and mitigation. Our results contrast with those based on proprietary insurance industry models that find insurance and mitigation to be complements.