Natural Disasters and the Supply of Home Insurance

The purpose of this briefing paper is to assess the implications of natural disasters for the supply of home insurance. We focus on the risk of hurricanes and earthquakes. Our analysis begins with a review of the challenges that catastrophes pose for the insurance mechanism and how insurers seek to overcome these challenges. We then examine insurance market conditions in selected jurisdictions in the U.S. and identify problems and areas of concern. Five jurisdictions were selected: California, Florida, North Carolina, Puerto Rico, and the U.S. Virgin Islands. In each jurisdiction, we examine the cost and availability of home insurance, hazard mitigation efforts, regulatory actions, and state government insurance mechanisms. We conclude with an evaluation of policy options to increase the supply of insurance and better manage catastrophe risk. These options and their pros and cons are summarized in Box E.1.