to be less desirable, it is not clear how much even the observed relationships are due to economic response to earthquake risk as compared to path dependency and unobserved quality).<sup>5</sup> This is all despite high earthquake risk-awareness in the city, the widespread publicity given to the city government’s earthquake risk map, the comparative ease of using a building’s age to determine earthquake-resistance codes applied to it, and renter confidence in the regulatory system that de jure codes were in fact enforced.

Again, absent legal requirements, few people in risk-prone areas buy insurance.<sup>6</sup> In the 1996 floods in China, only 2.1 percent of the damage was covered by insurance. During the 1998 floods in that country, only 3.3 percent of damage costs were insured (OECD, 2008).<sup>7</sup> It is worth noting that in Kobe, Japan, only 2.7 percent of the damage done by the Kobe earthquake was covered by insurance – this is not just a problem of poverty or lack of availability. Nonetheless, in the richest countries as a whole, insurance covered about 30 percent of the cost of natural disasters in 1980-2004 on average, compared to 1 percent in developing countries (Linnerooth-Bayer and Mechler, 2007). This reflects an overall pattern of lower insurance rates for all risks in developing countries.<sup>8</sup> With regard to business, many firms worldwide voluntarily implement a range of mitigation strategies designed to ensure continuity (or at least reduce the length of interruption). At the same time, available survey evidence appears to suggest that the average business even in high risk areas in rich countries does comparatively little to prepare for disasters – and those preparations that they do accomplish appear to have little impact on their performance post-disaster (Box 4).

At the community level, public expenditure on disaster-prevention is sometimes deeply politically unpopular. While California voters often pass bonds for seismic safety upgrades, in New Orleans, for example, prior to Katrina, the Parish Levee board lobbied for flood protection to the level of a 100-year rather than 200-year hurricane and opposed hurricane protection floodgates at the mouths of the city’s drainage canals because the local share of the total cost was considered too high (Burby, 2006). Healy (2008) suggests that government spending on disaster prevention is not rewarded by voters in the US, in contrast to spending on disaster relief, which carries significant electoral benefits. Federal spending on disaster relief in a county can increase the incumbent presidential party’s vote percentage by 5 percent in that country compared to no response at all to prevention spending.

5 Thanks to Charles Scawthorn for this observation.

6 Insurance is of course an inadequate response for loss of life in any case. It also requires very large (advanced) markets --because so much of the damage done by natural disasters is due to big, extremely rare events, it requires considerable aggregation of the insured to produce a diversified portfolio not subject to considerable volatility in payments –evidence regarding the US National Flood Insurance Program suggests even an insurance market as large as the US may not be large enough.

7 Wharton (2008) suggests that in the US, insurance rates are lower (although sometimes are legally required to be lower) on buildings and areas where codes incorporate mitigation of losses from natural disasters. Benson and Clay (2004) suggest that this is not the case in a number of developing countries. 8 Thanks to Charles Scawthorn for this observation.

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