Natural Hazard Mitigation and Insurance:

The United States and Selected Countries Have Similar Natural Hazard Mitigation Policies but Different Insurance Approaches

GAO-09-188R: Published: Dec 22, 2008. Publicly Released: Jan 21, 2009.

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Orice M. Williams
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Office of Public Affairs
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Natural hazards adversely affect hundreds of thousands of people worldwide each year and cause extensive property damage. In 2007, a year that was not considered an exceptional one for natural hazards, natural hazards caused an estimated 14,600 deaths and $70 billion in property losses. For that year, the insurance industry covered $23.3 billion in losses. In catastrophic loss years, such as 2005--the year that saw Hurricane Katrina--losses can be far greater. Scientific assessments indicate that climate change is expected to alter the frequency and severity of natural hazard events, and as a result, losses can be expected to climb. Given this scenario, examining policies that are used in other countries to reduce the loss of life and property caused by natural hazard events and examining insurance approaches that provide coverage for natural hazard losses can help identify practices in both areas that could benefit the United States. Similarly, given the ongoing challenges facing the United States, international cooperative efforts may provide instructive examples of risk management and disaster reduction. Because of Congressional interest in these areas, GAO was asked to (1) identify policies used by other countries to reduce losses caused by natural hazards; (2) examine the extent of international cooperation among selected countries, including the United States, to mitigate natural hazards; and (3) identify approaches that other industrialized countries use to insure natural hazard risk and regulate insurers.

The countries that we studied use a variety of policies to reduce losses from natural hazards that are similar to policies used in the United States. As we have previously reported, mitigation policies, assessing and mapping hazard risk, land use planning, building codes, and public awareness, can be used to reduce the risk of losses from natural hazards. The countries we studied also participate in a variety of international efforts to minimize natural hazard risk. We found that these efforts are consistent with key practices in collaboration that we identified in prior GAO work. The six countries we studied use a variety of approaches to insure natural hazard risk and regulate insurers. Generally, their approaches involve both the government and the private sector. In four countries with government insurance approaches, property insurance policies include natural hazard insurance coverage at a fixed premium, and three of these countries have a government guarantee. All six countries have some type of private insurance approach, and four of these countries offer optional coverage of various natural hazards and have risk-based premiums. Finally, five countries have a centralized (federal-level) agency to regulate the private insurance industry. Three of these government agencies regulate the entire financial services industry--for example, the Australian Prudential Regulation Authority oversees banks, building societies, insurance companies, and other entities. Some of the functions of some of these agencies include authorizing insurance companies to do business, assessing solvency, and determining whether insurance companies comply with regulations. Australia and Germany have private sector-only approaches to insurance, and government involvement in pricing insurance is limited. For example, in Germany, prices are controlled only with respect to the company's overall financial safety and the equal treatment of all policyholders.

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