The Economics of Natural and Unnatural Disasters, edited by William Kern

The Economics of Natural and Unnatural Disasters, edited by William Kern, 2010, Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 143 pp. ISBN: 978-0-88099-362-3. Several high-profile disasters have rocked the world in recent years. The 2010 Haitian earthquake killed over 200,000 people, and the 2011 tsunami in Japan destroyed several hundred billion dollars of property and resulted in tens of thousands of deaths. Before these tragedies, Hurricane Katrina leveled much of New Orleans. With questions of how to plan for and rebuild from these natural disasters firmly in the public eye, William Kern has assembled a very timely volume that should help inform the debate. Tackling topics ranging from assessments of public policy's impact on disaster planning to the costs incurred in current tornado avoidance practices, The Economics of Natural and Unnatural Disasters surveys several areas of interest in a manner most ideal for those looking for an accessible introduction to disaster economics. After an introduction by editor Kern summarizing the work to follow, Chapter 2 begins with an essay by Howard Kunreuther and Erwann Michel-Kerjan advocating long-term contracts for natural disaster insurance. The authors begin by noting the increasing relevance of natural disaster insurance due to a trend toward urbanization and general movement to hazard-prone coastal counties, which raises the damages associated with any particular natural disaster. Kunreuther and Michel-Kerjan also argue that, given trends over recent years, climate change will trigger more disasters in these areas, thus making insurance even more important. While this point is debatable, considering other researchers (e.g., Pielke, 2005) find no increasing trend in hurricane destructiveness after accounting for urbanization and movement toward coasts, the underlying idea--that the need for disaster insurance is becoming more prominent--is a good one. The authors then proceed with a novel recommendation: long-term disaster insurance contracts that, when signed, attach to the property and bind both homeowners and insurers to a fixed premium for a defined period of 10 or 25 years. Such contracts prevent suboptimal levels of insurance from homeowners regularly underestimating the chance of a disaster, coupled with short time horizons or budget constraints. Long-term contracts bind the homeowner to coverage, at the same time avoiding the contracting costs associated with annual policies and lengthening homeowners' time horizons to undertake efficient preventative measures that pay back only over the long term. In the authors' view, a particularly promising chance to implement this policy is the national flood insurance program. The authors provide only enough of the picture to be provocative and encourage thought along unconventional lines. Several questions arising from a binding longterm disaster insurance policy spring to mind: Why is the time horizon alignment to ensure efficient preventative measures necessary for natural disaster insurance but not other insurance lines, such as property, health, or automobile insurance? With insurance contracts attached to property, what can a buyer do and who would best be served by greater or less coverage? And will consumers react to long-term fixed rates by submitting more claims with the knowledge that insurers cannot respond by raising prices? As the authors further develop this exciting topic, no doubt we will find answers to these questions and more. In the next chapter, Anthony Yezer contributes insights into economic effects from changes in expectations of disasters. Yezer first discusses how property values incorporate disaster expectations, which are generally based on past natural disaster experience. As disasters increase or decrease in occurrence rate or severity, these expectations shift over time. However, property values cannot factor in unexpected disasters, so it is precisely these disasters that can cause the most economic harm. …