Hurricane risk and coastal property owner choices

Abstract

PurposeThe purpose of this paper is to contrast the behavior of a US homeowner exposed to hurricane risk with government policies designed to limit hurricane losses. Owners limit these losses by selecting structural improvements or mitigation and wind and flood insurance.Design/methodology/approachThe paper uses mitigation costs, hurricane probabilities, and insurance premiums to frame rational cost‐minimizing choices for the homeowner.FindingsFirst, even though nationwide hurricane damage costs are large, the cost‐minimizing response for an individual property owner may be to buy no mitigation or structural improvements, no flood insurance and minimal wind insurance, as probabilities of strong hurricanes striking particular locations are extremely low. Second, additional insurance is a less costly defense than structural improvement, even under much higher insurance premiums and hurricane strike probabilities. Third, federally subsidized flood insurance may reduce the effectiveness of government programs encouraging structural mitigation.Originality/valueThe last few years were underscored by the catastrophic damages of Hurricanes‐Katrina, Ike and Wilma. Enormous costs suffered by the public and private sectors could have been avoided with greater mitigation by homeowners. This paper examines the financial incentives for such mitigation. Those incentives are examined in a previously untested framework.