STEVE INSKEEP, host:
The big recent hurricanes may have struck the Gulf Coast in Florida, but even homeowners in New York City and the coastal northeast have to pay more for insurance. We asked Howard Kunreuther, of the University of Pennsylvania's Wharton School why he insurance companies are doing this.
Professor HOWARD KUNREUTHER (Wharton School - Center for Risk Management, University of Pennsylvania): I think what's really happening, is that the insurance industry is now concerned about the possibility of large losses from hurricanes throughout the country, and throughout the northeast, and on the Gulf Coast. So, I think what you're seeing is, a tendency for them to really reconsider whether or not they are - can provide the kind of coverage they have in the past.
INSKEEP: Here's why this seems like a huge deal to me. You go down to New Orleans, and people say the rebuilding of that city is all about insurance. The economy can't function, people will not invest; they will not take the risk. If you're saying it's going to be much harder to get insurance in a huge swath of the United States, what does that mean for the economy?
Prof. KUNRUETHER: The real challenge, I think, is to find a way of providing insurance with the rates reflecting the risk. If you don't have rates that are based on risk, you find yourself in a situation where people will not have any incentive to invest in loss prevention measures, where, if they did that, they could get a reduction in their insurance premiums. And people would not have any idea in terms of how hazardous the areas would be.
Having said that, there is a real challenge for people who would have to pay extremely high premiums in many of these areas. And that's where you'll have to have some kind of subsidy - whether it would be state subsidies or federal subsidies - or some ways to get people who are in the lower income bracket to be able to afford their insurance.
INSKEEP: Aren't insurance companies enjoying very good years, even though they've had a lot of losses in the last couple of years? Why would taxpayers be subsidizing, in effect, insurance companies that were already making a profit?
Prof. KUNRUETHER: Profits are variable from year to year. A series of losses can wipe out these profits. So it's hard to say if there was a high profit last year, that it will be a high profit next year. So I think in that sense, we have a challenge with respect to what one should do in the future.
If you have insurance and protection, before a disaster - coupled with loss reduction measures - you will avoid the enormous amount of disaster relief that comes after a major disaster. Because people will have had safer houses, and we will not have the federal government and state governments, having to come to the rescue as they did after Katrina, and after every large-scale disaster that we've had in this country in recent years.
INSKEEP: Howard Kunruether, of the Wharton School. Thanks very much.
Prof. KUNRUETHER: Thank you.
INSKEEP: It's MORNING EDITION from NPR News. I'm Steve Inskeep. Transcript provided by NPR, Copyright NPR.
