Catastrophic Risk, Homeowner Response, and Wealth- Maximizing Wind Damage Mitigation

Abstract

Many experts encourage homeowner.s to improve their houses to better survive natural catastrophes and reduce overall societal costs. However, we find that 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, because mitigation does not generally reduce damages to below subsidized deductibles. If insurance premiums increase or if hurricane strike probabilities or market returns decrease, then 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.