Catastrophic Risk, Homeowner Response and Wealth Maximizing Wind Damage Mitigation
نویسندگان
چکیده
Many experts encourage homeowners to improve their houses to better survive natural catastrophes and reduce overall societal costs. However, we find these encouragements are not necessarily financially sound for the homeowner at risk of hurricane wind damage. We find that subsidized insurance reduces the incentive for a risk-neutral homeowner to purchase structural mitigation, as mitigation does not generally reduce damages to below subsidized deductibles. If insurance premiums increase or if hurricane strike probabilities or market returns decrease, the wealth maximizing homeowner drops insurance and purchases mitigation. For homeowners to purchase both mitigation and insurance, high deductible/low premium insurance must be offered. JEL classification: D1; H2
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