Natural disasters and the faults of state-funded reconstruction

Paolo Belardinelli // 19.09.2016

 

I hail from Marche, one of the regions hit by the recent earthquake in which 292 people died. Unfortunately, that part of Italy is not new to these tragedies. This is the third fatal earthquake in less than ten years. In 2009, 309 people died in the region around L’Aquila, which also displaced roughly 65,000 people. In 2012, an earthquake in Emilia-Romagna killed 27 people and caused roughly 5,000 to evacuate.

 

In his funeral homily the Bishop of Rieti Domenico Pompili claimed that all those deaths were caused less by Nature than by man. To be fair, even though we cannot prevent earthquakes, lives can be saved with the right precautions.

 

In addition to the earthquakes, we Italians have also grown used to the long discussions that follow them about the soundness of our buildings—which often do not meet safety standards—rebuilding efforts and, most of the time, corruption and a waste of public money.

 

Ex-post, reconstruction financed and managed by the State seems to be the only viable option and wasted money is a side effect we are forced to ignore. Nevertheless, as we should have learnt, every ex-post is an ex-ante of another earthquake.

 

We should be aware that whenever the State fully funds the reconstruction, it de-incentivizes people to take care of their own houses, for instance, by buying an insurance policy that covers the risk of natural disasters.

 

Increasing the insurance coverage for natural disasters would help prevent their worst consequences. Insurance companies would probably pay more attention than the State to the compliance with seismic safety standards and they would pressure policy owners to meet such standard by adjusting their insurance premiums.

 

A 2012 report by the European Commission compares the different insurance systems for natural disasters in place across European member states. As for earthquakes, it divides European member countries in clusters which face similar problems. It is not surprising that Italy, together with Greece, forms the most problematic cluster. Obviously, these are the two countries in which the risk of earthquakes is the highest, but in addition they have an underdeveloped insurance market compared to countries such as Belgium, Spain, France, Ireland, or the UK. While in these countries earthquake insurance is bundled with another base policy – usually fire, personal accidents, life and property insurances – in Italy and Greece earthquake insurance is offered only as an optional extension of other policies.

 

Insurance against natural disasters is not entirely problem-free. For example, the risk of earthquakes is concentrated in few areas and adverse selection is a big issue to consider. The European Commission proposed making insurance compulsory, so that the residents of regions that are less prone to earthquakes participate to the insured pool, thus driving premiums down.

 

An interesting case is the New Zealand system where an independent public entity is charged with insuring dwellings up to a maximum of $100,000 (the government recently proposed raising this maximum to $200,000; in the end they did not). Above this threshold, private companies in a competitive market offer additional insurance schemes that homeowners are free to buy. The main advantage of this solution is to leave money in people’s hands, avoiding the losses due to corruption and mismanagement. Meanwhile, different from a compulsory insurance scheme, it does not force private insurance companies to enter a market that they do not consider as profitable.

 

Paolo Belardinelli is a Research Fellow at the Istituto Bruno Leoni (IBL).

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).