Decision-Making Problems in Natural Disaster Insurance: Public Intervention

Article Information
Journal: Business and Economics Research Journal
Title of Article: Decision-Making Problems in Natural Disaster Insurance: Public Intervention
Author(s): Tulin Altun
Volume: 9
Number: 2
Year: 2018
Page: 349-361
ISSN: 2619-9491
DOI Number: 10.20409/berj.2018.109
In this study, decisions about natural disaster insurance is examined through the behavioral literature and public interventions are suggested. Natural disasters are low probability but high consequence events. In natural disaster insurance, the risk and uncertainty are higher than in other markets, leading to more frequent decision-making problems. Intuitive thinking, systematic bias, learning mistakes, social norms and social comparisons, public aids and political interests cause non-rational decisions to be made. Non-rational behavior of insurance consumers, suppliers and public sector, which operates as a regulatory institution causes inadequate insurance coverage. Inadequate insurance coverage leads to loss of individual and social welfare and increases the government’s implicit fiscal liabilities. Asymmetric paternalist political instruments, such as mandatory insurance, framing, multi-year insurance contracts can reduce decision-making problems. Regulations on insurance contracts and public-private partnerships can resolve market failures.

Keywords: Natural Disasters, Disaster Insurance, Behavioral Theory, Decision-Making Problems Public Interventions

JEL Classification: D81, G22, H40 Full Text