An Analysis of the Demand for Earthquake Insurance

Authors

  • Manoj Athavale,

    1. Manoj Athavale is with the Department of Finance and Insurance, Ball State University, Muncie, IN 47306-0345; phone:(765) 285-4251; e-mail: Athavale@bsu.edu. Stephen M. Avila is with the Department of Finance and Insurance, Ball State University, Muncie, IN 47306-0345; phone: (765) 285-5220; e-mail: Savila@bsu.edu. This research was supported by the Center for Actuarial Science, Insurance, and Risk Management in the Miller College of Business at Ball State University. This article was subject to double-blind peer review.
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  • Stephen M. Avila

    1. Manoj Athavale is with the Department of Finance and Insurance, Ball State University, Muncie, IN 47306-0345; phone:(765) 285-4251; e-mail: Athavale@bsu.edu. Stephen M. Avila is with the Department of Finance and Insurance, Ball State University, Muncie, IN 47306-0345; phone: (765) 285-5220; e-mail: Savila@bsu.edu. This research was supported by the Center for Actuarial Science, Insurance, and Risk Management in the Miller College of Business at Ball State University. This article was subject to double-blind peer review.
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Abstract

This research examines the decision to purchase earthquake insurance by analyzing data on earthquake insurance price and penetration in the New Madrid fault zone in Missouri. Earthquake risk is of concern to consumers, the insurance industry, industry regulators, and government agencies because of the potentially catastrophic nature of losses resulting from a major earthquake. Despite the significance of the earthquake peril, the recent literature does not contain estimates of the price and income elasticity of the demand for earthquake insurance. Our analysis indicates that homeowners acquire earthquake insurance because of risk considerations, at higher levels of risk the demand for earthquake insurance is higher, and the price of earthquake coverage does not provide incremental information in explaining the demand for earthquake coverage.

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