Changes in Tackling Disasters - Essay Example

Taking Chances with Disaster Despite the Cost In the summer of 2007, the United Kingdom was hit by a series of floods that resulted in the destruction of a huge number of properties. The floods swept large sections in the entire country. The worst of it happened in East Yorkshire and the Midlands, Gloucestershire, Worcestershire, Oxfordshire, Berkshire, and South Wales. These happened during the months of June and July. Many attributed it to climate change. The floods were the peak of the very wet and unpredictable weather that occurred over the UK in the previous months. The worst rainfall started in May and continued all throughout the summer. The relentless rains caused the rivers to swell and catchments also became saturated. However, whatever the reason for the floods is, it cannot be denied that indeed it was one of the most catastrophic events that hit the UK since the World War 2. The result of the floods was the great destruction of many households. Homes were badly damaged and smaller properties such as appliances and furniture were rendered no longer usable. In the aftermath, the Association of British Insurers stated that roughly 27,000 household and 6,800 business claims have been filed for the June floods. Another 17,500 residential and 7,500 business claims followed for the July floods. It was expected that these insured families and business entities would be able to relocate or recover soon once the claims were released. Despite the fact that the claims could drain much of the insurance companies' resources, they were obliged to comply with their policies. On the other hand, about 25% of the families and small businesses have been found to be uninsured. They had suffered the same calamity but theirs could be worse since they did not have the immediate availability of funds for quick relief and rehabilitation. In November 2007, a report came out stating that 2.2 million properties in the UK are located in flood risk areas. The number is about 10% of the total homes in the UK. This also represents 5 million people. (RMS) However, with the aforementioned fact that a quarter of the families and small businesses were not insured, questions are raised about the reasons why this is so. The answers were provided; depending on whose vantage point did it come from. There were those that said that the insurance premiums were too high for households and small entrepreneurs to high. This why they decided not to have their properties covered. Others also said that they simply did not bother to have themselves insured because they did not believe the insurance would not do them any good anyway. Between these two likely answers, what is common is that this 25% of the people were found to low aversion for risks. The insurance firms might be offering their coverage for high premiums or not, but if the people maintained this attitude towards risk, they would definitely shun any coverage regardless of their capacity to pay for it. Indeed, this would lead into the conclusion that for this low or even non-aversion towards risk might be the reason why there were quite many who did not immediately recover after the 2007 floods. The risk they took cost them their properties without any guarantee that they would be able to rebuild at the soonest possible time. It was obvious that the people found it difficult to deal wisely with low-probability, high loss occurrences. At the surface, it might just be because the premiums are too expensive for them, as this was often their reply when asked why they did not avail insurance coverage for themselves. However, UK insurance firms then and even until these current times have always been known to offer very competitive premium rates. Despite this fact, there were still many who did not have themselves covered. Consequently, this may lead to the idea that this certain section of the people might have borne with them the behavior that displayed "represents non-optimal decision-making based on individuals utilizing simplified heuristics, ones that do not require making explicit tradeoffs between the expected benefits and costs of different alternatives." (Kunreuther and Pauly) The theory is that the many individuals in society still do not have the will undergo the necessary processes in order to create decisions by carefully weighing the pros and cons and the consequences of contrasting courses of action. Such theory does not mean that these individuals merely do not have the capacity to process information even in a relatively healthy manner to come out with a decision. This does not mean that the problem is related only to a person's unique weakness. The sheer number of those who took the risk of not seeking insurance coverage could certainly say that this phenomenon were not isolated cases. The behavior was common and so there should be a common basis for it. Kunreuther and Pauly articulated it quite well when they said " We should point out at the outset that we do not believe that individuals always go through the types of calculations that are required for maximizing expected utility whenever insurance is available. Our objective is rather to show that the types of search costs associated with collecting information can be enough to discourage individuals from undertaking these calculations; some interesting predictions about behavior follow from this." (Kunreuther and Pauly) This only shows that for a large number of the population to think the same, there should be a common wide-reaching factor that made it possible. The idea is that there should be something common that discourages all these individuals to calculate best the costs or consequences of their decisions or actions before actually confirming and realizing it. The thesis is that it was not the act of discerning prior to the creation of the decision that these individuals disliked. Instead, it was the time and effort necessary in obtaining the information and determining the risk factors, which they aver. This point is relevant because this might prompt the insurance companies to reevaluate the methods it used in promoting their products. If the problem is just that the people find it tedious to access information that they would need in order to make decisions, then these firms would certainly have to introduce more effective ways in relaying to their potential clients the information that would be needed. First, it is necessary to explain further the claim that the reason why there were quite a number of people who did not get insurance coverage was simply because they find the immediate cost is far expensive compared to the probability of the incident. According to its proponents, this is the essential factor. This assumes that the potential insurance holder is relatively well informed of the risks faced by his property and, of course, of the amount he must pay for the premiums. The simple logic would be that while he pays for his premiums regularly, the possibility of a natural disaster might be very rare. Therefore, his most rational conclusion would be that the cost of paying for the premiums is too high while the reason for having it is quite slim. In other words, the price is high for a product that may never be received. This conclusion will certainly discourage the potential client from having his property insured. Oftentimes, the so-called 'well-informed' potential client is not really equipped with the proper understanding of the probabilities of a disastrous natural event but because he immediately pursues his line of reasoning of comparing the actual monetary cost to the probable product, he may find it useless to gather more information. In this circumstance, it becomes clear that the insurance companies will have to improve its efforts in educating the people of the potential risks. They will have to produce the most credible explanations regarding the possibilities of natural calamities so that they can instill in the people the importance of insurance for their properties. After all, the studies that they pursue prior to achieving this will also provide them the degree of probabilities, which is information they will need in determining the risk levels and the subsequent rate of premiums. Nevertheless, this effort will be from the insurers' end only. If this does result into a common effect on the population is another thing. According to the study made by Kunreuther and Pauly in a paper titled, Neglecting Disaster: Why Don't People Insure Against Large Losses, there are three different responses that individuals usually evoke when offered insurance coverage. (Kunreuther and Pauly) One is to totally ignore the insurance. Two is to get insurance coverage immediately and, three, is to seek information first before deciding. The first response means that an individual does not make an effort at all in searching the costs and in obtaining information on the probability of a disaster. Without any knowledge about these, it is only natural that he would not decide on buying insurance. In the second, the attitude of the individual is to be insured without making any further study on the implications. He does not see the importance of gathering more information of the possibility of a natural calamity, thus, he does not incur costs for making such an effort. He would, however, get a glance of the prices the insurance firm's representative would offer him and pick what he thinks best works for his advantage. The third, which also happens to be the least common response, refers to the attitude of gathering all the information that would provide the basis for a firm decision. In this regard, the individual learns more about the cost of paying for insurance and the probability of a disaster. With this information in hand, he makes a decision on the insurance offer. For some, however, this process may be time-consuming but for others, this is the better approach. It is convenient to conclude that non-aversion to risks is based not on the individual trait of mere audacity, for instance. Most often, this is the result of the individual's inadequate knowledge of the circumstances surrounding a particular situation and its consequences. Thus, he may also push himself to make decisions and actions, the outcome of which he is not also aware. At the surface, he may seem bold but it is all because he does not know the consequences of his action or inaction. In the case of a UK household, for example, the family may not care to listen to an insurance agent's explanation on the necessity of the product he is offering them, apparently, because the cost of it is enough bases why they should not get one. From a distance, they can either earn admiration for their audacity but it is more likely that they will get negative comments for not believing the possibility of devastating floods. Ultimately, the end results of this ignorance are severely damaged properties and a great depth of regret; two things, one practical and the other behavioral that could make quick recovery from a disaster impossible. On the other hand, aversion to risks cannot always be a result of an individual's wisdom. Immediately taking insurance coverage may only be a sign of rashness just the same. One can buy insurance as soon as it is offered to him because he considers the risks possible but this may also be prompted by an inadequate knowledge still. If he does not take an extra effort at confirming the words of an insurance agent about the probabilities, then he may just pay for something that is least bound to happen. If he does not take some more time in searching for the best offers, he may just regretfully find out soon that he is paying a far more expensive coverage than others are. Nevertheless, when a calamity actually occurs, he would certainly be at better position to recover than those who were not insured. The only mitigating factor is that might be paying more for what could actually get. Aside from the inadequacy in getting information for the purpose of deciding over insurance offers, the insurance firms' attitude in promoting their products can be a significant factor. It is not a secret to the people how insurance firms extract profits. Therefore, it is only natural for them to be quite wary about the how their money is going to be spent once disaster strikes. In a very recent report from BBC News, the National Flood Forum disclosed that the prices of insurance firms for the flood-prone areas vary greatly. (Moshiri) It said that they found neighbors in a common location having different rates of insurance premiums when they actually share the same levels of risks to floods. Information like this will only increase the number of people skeptical on insurance coverage. These data only highlight the profitability of the insurance business instead of the practicability of having insurance. The impression created is that insurance firms only scare people with the prospect of a natural disaster in order to gain revenues. Every time an insurance agent explains the necessity of his product, people will only look at who is talking and not at what he is talking about. Therefore, it is very important for insurance firms to consider the behavior of people it considers as prospective clients. To a lesser degree, it may do the same to its policy holders as well. By doing so, they will be able create a more effective promotional campaign, one that educates the population of the risks before anything else. Of course, before this can take place, a credible research that is supported by empirical data should be achieved first. It is obvious that there are already misconceptions about the insurance business. That is it is important to overcome this with the systematic information drive on the continuing risks of floods that UK's population face. Instead of claiming to have the cheapest premium rates, it may as well seek ways to improve its ability on convincing people about the necessity of insurance coverage for their properties. Through this way can the people overcome their ignorance over costs and probabilities, which can spell advantages for both the insurance provider and policy holder in the end. Works Cited Brown, Colin. "Households may be left without flood insurance," The Independent, October 11,2007 Kunreuther, Howard and Mark Pauly. Neglecting Disaster: Who don't People Insure Against Large Losses, The Wharton School, University of Pennsylvania, March 6, 2003 http://opim.wharton.upenn.edu/risk/downloads/03-08-HK.pdf Moshiri, Maryam. "Flood insurance deals 'vary greatly'," BBC News, Saturday, 28 November 2009 Stuart-Menteth, Alice. UK 2007 Floods, Risk Management Solutions, Read More