The Case for Comprehensive Disaster Insurance

ALTHOUGH disasters of various sorts are part of our everyday life, even if only vicariously, little empirical and theoretical work has been done by economists on the long-run recovery problems arising out of these events. This is unfortunate because the cost of unexpected catastrophes and the problems they have created for both the local community and federal government have increased in recent years and threaten to get even further out of hand unless some basic policy changes are undertaken. This paper presents empirical evidence on the inefficient and inequitable forms of recovery under the present system of relief, and suggests comprehensive disaster insurance as an alternative. The next section discusses the role of the Small Business Administration (the SBA), the principal federal agency providing funds to the private sector through its Disaster Loan Program. I then describe the current insurance industry practice with respect to protection against disaster damage and suggest a framework for developing alternative systems. After examining several possible insurance schemes, a system of comprehensive coverage against disaster losses to the private sector is proposed. Figures on the role of the federal government in Alaska following the Good Friday Earthquake of March, 1964, will be frequently used for illustrative purposes. Although many of the actions related to our 49th state appeared rather special and unusual at the time, they have set the pattern for the present form of relief. Congressional legislation triggered by a series of dissasters since the earthquake has provided more generous assistance to victims than ever before.'