Working Paper

Defining the Roles of the Public and Private Sector in Risk Communication, Risk Reduction, and Risk Transfer

May 22, 2017 | Carolyn Kousky, Howard Kunreuther


This paper discusses the challenges of insuring against flood, earthquake, and terrorism losses, and suggests ways to improve public–private partnerships for disaster financing in three interrelated areas: risk communication, reduction, and transfer.

Key Findings

  • Disaster insurance premiums should be reflective of underlying risk, with information on hazards communicated to prospective policyholders.
  • Cost-effective mitigation measures can be encouraged through insurance premium reductions and financing arrangements.
  • Affordability of insurance for low-income residents should be addressed through public sector assistance, not subsidized insurance premiums.
  • Catastrophic losses that cannot be covered by private reinsurance or other risk transfer instruments should be backstopped by the public sector.
  • The public sector should provide incentives, information, and some funding for investments in risk reduction.
  • Priority should be given to all natural disasters being covered in a single insurance policy.


Insurance is an essential component of household and community resilience: it protects insureds financially against disaster losses, can encourage investments in cost-effective mitigation measures through premium reductions, and facilitates rebuilding of property and long-term recovery following a disaster via claim payments. Private insurers face challenges in providing protection against low probability, high-consequence events, however, and the perceived market failures have led governments around the world to create various (quasi to fully) public insurance entities, often designed as public–private partnerships. This paper synthesizes findings from six papers and the resulting discussion at a November 2016 workshop, “Improving Disaster Financing: Evaluating Policy Interventions in Disaster Insurance Markets.” Participants evaluated disaster insurance programs for flood, earthquake, and terrorism losses, as well as comprehensive homeowners policies. This paper discusses the difficulties in providing protection against these types of disasters and suggests ways to improve public-private partnerships for disaster financing in three interrelated areas: (1) risk communication, (2) risk reduction, and (3) risk transfer. The paper concludes with a proposal for a comprehensive insurance program that could harness the benefits of both the public and private sectors.