Who Pays for the Rising Cost of Natural Disasters: QuickTake Q&A

The force of Mother Nature cost mankind $175 billion in 2016, enough money to rebuild New York’s One World Trade Center 44 times. About 8,700 people globally lost their lives or went missing in disasters that included earthquakes in Japan, New Zealand and Ecuador, floods in the U.S. and China, and Hurricane Matthew in the Caribbean. That compares with $380 billion in 2011 when earthquakes in Japan and New Zealand pushed economic disaster losses to a record. In both years, less than a third of the damage was covered by insurers.

For starters, insurance is less accessible and less affordable for people in poorer nations. Elsewhere, the insurance industry struggles with what’s known as negative selection, which means clients tend to buy coverage only for the risks they are most exposed to. If you own a house on a storm-exposed shore in Florida, you might think more about disaster insurance than if your house is in the countryside. Another factor: Many people expect their government will compensate them for damages in natural disasters. This is one reason why insurance demand is low in earthquake-prone regions in countries such as Italy or Turkey.