Michael Faure & Véronique Bruggeman

Abstract

Although the insurance industry has expressed growing concern over the sharp rise in losses from natural disasters, only about one third of potential victims have purchased first-party catastrophe insurance. Despite the several advantages of first-party insurance, there is in practice little demand for or supply of such coverage. This article therefore asks, from a behavioral law and economics perspective, why first-party insurance is so underutilized and why it could serve as a viable alternative to government compensation. It further considers whether compulsory first-party disaster coverage might offer a solution. The article concludes by examining the circumstances under which expanding the availability of first-party catastrophe insurance should be encouraged as a way to give potential victims greater control over their compensatory resources while also strengthening incentives for loss prevention.

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