An Investigation of Residential Insurance Demand-side Reactions After a Natural Catastrophe: The Case of the 2010–11 Christchurch Earthquakes

Abstract

This study gives an empirical analysis of residential insurance demand-side reactions after an earthquake disaster using survey data. The paper discussed the study hypothesis from economic analysis perspective with significance econometric tests to explain how insurance demand for residential property changed post-catastrophe. Our empirical results observe higher risk perception from those who have had prior experience of catastrophes than those who have not. This positively influence the demand for residential insurance cover in the aftermath of a natural disaster with higher demand observed in the regions with higher seismic risk. These results support the research hypothesis and are consistent with the findings in our literature. A change in insurance level is less likely when the cost of the insurance is high, when the expected loss is low, and individuals becomes wealthier. We also find evidence of effects that remain to be explained, such as the greater sensitivity to both cost of insurance coverage and risk perception than to the size of the potential loss. We observe a positive relationship between household characteristics and the degree of risk aversion and how this changes with change in level of income, change in value of insured assets and change in insurance premiums. An increase in individual’s income alone has no major effect on insurance demand if the premium rates are within the demanders’ price range. However, positive loading of premiums to reflect transaction costs and possibility of adverse selection might affect insurance coverage level if premium rates become too high. In such cases, the direction of the effect depends on whether an increase in income increases both the premium rates and the insured asset and on whether the insurance demander has increasing or decreasing absolute risk aversion.