Mitigation Consensus

The Griffith Insurance Education Foundation recently brought together industry, government and academic leaders — many from disaster-prone coastal states such as California, Florida, Louisiana and Mississippi for a symposium at Ohio State University.

By the end of symposium, which was titled “The Three Ms of Catastrophic Risk Management… Mitigation, Money and (Residual) Markets,” leaders had come to a consensus: With more than 50 percent of the country’s population living in coastal counties, the insurance industry and policymakers need to educate consumers about the importance of a long-term view of catastrophic risk.

This consumer education must include greater awareness of the value of mitigation — making improvements to homes to safeguard them from storms and earthquakes.

“We all need to be proponents of mitigation — and that requires consumer education,” said Mississippi Insurance Commissioner Mike Chaney. “Long-term, that’s the solution to reducing losses, no matter the catastrophe.”

The fact is that investment in such improvements are likely to yield expected benefits over the life of the house that are considerably greater than the cost to make these improvements, according to Howard Kunreuther, Ph.D., of The Wharton School at the University of Pennsylvania and author of “At War With the Weather.”

But catastrophic risk mitigation requires a common understanding of the extended timeframe for return on investment required.

Retrofitting older homes and safer structural designs and materials for new buildings require consumer and homebuilder involvement, along with industry and regulatory solutions.

Consequences of mitigation, or the lack thereof, may not arrive for years, making it difficult to convince consumers to take preventive action in the present. For instance, a study by Tobin and Calfee in 2005 indicated that 84 percent of residents in flood-prone areas had not purchased flood insurance — although nearly half were supposed to have purchased it by law.

Attendees pointed to the need for consumer education that dramatizes natural catastrophe risks — similar to crash-test dummy car accident simulations — so that long-term consequences may be understood in the here and now.

People need to think long-term about planning for disasters, according to The Wharton School’s Kunreuther. “By nature we are myopic and have a short-term horizon when it comes to catastrophes,” he said. Thus he recommends near-term incentives, such as tax rebates and short-term loans, to encourage investment in mitigation measures.