Residential insurance market responses after earthquake: A survey of Christchurch dwellers

Abstract

Lack of effective information on the impact of catastrophe on insurance market affects risk assessment and the quantity of insurance coverage. This leads to suboptimal decision making with respect to level of insurance coverage to purchase. This study investigates the New Zealand residential insurance after the 2010–11 earthquakes. A set of hypotheses are used to investigate the impact of catastrophe from an economic analysis perspective with appropriate statistical tests. The results show that change from full replacement value policy to nominated replacement value policy is the key determinant of the direction of change in the level of insurance coverage in the aftermath of the earthquakes. Policyholders increased the level of insurance coverage to comply with the new policy modification; other varying reasons for the insurance coverage change are observed. The earthquakes highlighted the plight of those who were underinsured prompting policyholders to update their insurance coverage to reflect the estimated cost of re-building their property. It is also observed that insurance policyholders update their risk perception immediately after major catastrophe losses. The level of risk aversion has an impact on decisions made post-disaster and both risk aversion and perception are positively correlated with change in the level of insurance coverage at all levels of income. Thus, if insurance demanders perceive a higher possibility of further natural disasters then they will always adjust their insurance coverage appropriately. A more comprehensive data set and robust econometric analysis is required to rigorously investigate this proposition.