ABSTRACT
This chapter investigates the impact of insurance affordability criteria on uninsured natural catastrophe losses. The vehicle for analysis is a model of a catastrophe insurance market with explicit representation of the key stakeholders (homeowners, primary insurers, reinsurers, and government). The theoretical framework is applied in a case study of eastern North Carolina with spatially explicit representation of hurricane damage due to wind and storm surge. Affordability has become an area of concern in that the cost of insurance may be beyond the capability of a household to pay leaving it vulnerable to catastrophic losses if an event occurs. We identify the homes that would fall below an affordability threshold, expressed as a percentage of home value and examine the effect of loss of insurance on the integrated model. Examining affordability thresholds of 1% or 2% of the home value, we find that the homes that fail the affordability test account for a high proportion of expected losses in the high-risk region or our study area and subsidization of insurance rates would not be cost-effective.
