Natural disasters, land-use and insurance

The urbanization of areas exposed to natural disasters depends on a combination of land-use and insurance policies. The main results of this study, are on the effects which redefine the optimal red zone as the climate or the population changes.

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The economic costs of natural disasters have risen dramatically over the last few decades. Besides the increasing importance of climate change, this trend is largely explained by the growing number of people and businesses located in exposed areas and the value of their assets. We discuss this in greater detail, in our article from The Geneva Risk and Insurance Review.

Many areas that are exposed to catastrophic risks are inhabited and used for economic activities. In China, as early as in 2004, 50% of the population was living in the 8% of the land located in the mid- and downstream portions of the country's seven major flood-prone rivers. These individuals cumulatively  contribute over two-thirds of the total agricultural and industrial product value. In 2012, 80%, or $2.9 trillion dollars worth of Florida’s insured assets were located near its coasts, the areas with the highest risk in the state. Globally, the world's coastal areas host a large and growing population in many of the world's largest cities.

The solutions for controlling urbanization in exposed areas combine land-use and insurance policies. This growing urbanization in exposed areas is favored by the fact that households which are settled in the exposed areas do not bear the full cost of the risk they take. Our focus is on this type of free-riding. We limit our scope to the non-life losses from these disasters.

By: Bertrand Villeneuve/Université Paris-Dauphine

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