Consumption insurance against natural disasters: evidence from the Great Hanshin-Awaji (Kobe) earthquake

Abstract

We investigated whether people were insured against unexpected losses caused by the Great Hanshin-Awaji (Kobe) earthquake in 1995 and found that the full consumption insurance hypothesis was rejected overwhelmingly, suggesting the ineffectiveness of the formal/informal insurance mechanisms against the earthquake.

Acknowledgement

We would like to thank the Quality of Life Policy Bureau, Cabinet Office, and the Hyogo Prefecture for providing us with the valuable data set. The views expressed in this study are our own.

Notes

¹ Our empirical framework will not change under the constant relative risk aversion (CRRA) utility.

² Shortly after the earthquake, the local governments conducted metrical surveys and issued formal certificates for damages to houses, and the available information on damages is objective and accurate.