Insurance; an Effective Solution of Natural Hazard Management

Document Type : Applied Article


1 Ph.D candidate of health economics at Tarbiat Modares University

2 Associate Professor of economics at Tarbiat Modares University

3 Assistant Professor of economics at Tarbiat Modares University

4 Associtat Professor of economics at Moghadas Ardebili University


In the last decades, natural hazards have burdened many economic and physical losses to the countries. After hazard, the level of capital stock decreases strongly and household assets will be at risk seriously, and by decreasing the amount of income and saving, it will lead to lower the levels of welfare. After hazard happened, government’s expenditure will increase for helping victims and reconstruction. While by an accurate programming to reduce risks before the hazard, the loss will decline dramatically. Developed countries also apply the approach of prevention as a solution to lower the loss. The amount of capital in the building sector in comparison with the whole investment is high in Iran. Earthquake is the major reason for buildings to be destroyed, therefore finding an appropriate solution to save the national wealth seems necessary. After studying the history of earthquake insurance in the U.S.A. and Japan as the best samples of insurance industry, the insurance industry of Iran will be studied. Then, by presenting a conceptual method which can be considered as the innovation of the paper, the most effective solutions for facing with losses of hazards, and especially earthquake, will be introduced. In developed countries insurance is used as a most important and most effective way for natural hazards risk management to share risk to the policy holders. By using legal requirements, appropriate and justly pricing for premium and government supports of some groups of the society, the shortage of demand for the earthquake insurance must be solved and by increasing in the liquidity, the insurance industry will cause to development. And also, in the long run, earthquake insurance will lead to reinforced and standard building that will lower the losses down as much as possible.


Natural hazards are shocks that impose high amounts of financial loss to the societies. How society face with these kinds of hazards, depends on the level of development (Emamgholipour, 1393). Because Iran is located on the Alp- Himalayan earthquake band, it experiences earthquakes, repeatedly. Severe earthquakes can lead to severe social problems that cost government highly. According to the statistics, in developed countries more than half of the loss has been paid by insurance companies, while in developing countries very low amount of the losses has been paid by the insurance companies. The high ratio of capital formation in building sector to the whole investment of Iran shows the necessity of looking for a way to save this national wealth from the earthquake (Amkachi, 1372). In this paper the role of insurance as a way to compensate and reduce the effects of natural hazard is studied, with the approach that by developing and improving insurance industry, in the case of similar hazards, the physical and financial loss will be minimized.


Earthquake is a kind of natural hazards that have both direct and indirect consequences on the area and its residents. Besides the immediate and short run, it has long run effects too. Hence, for reducing the short run and long run negative effects, it is also important to find a way to manage hazards correctly. This paper uses an applicable method to study and define a conceptual model of the most effective solutions for facing with earthquakes and show how it can solve the problem in short and long terms and manage the crisis.


In table below the time line consequences of earthquake are presented.
Table1: the time line consequences of earthquake

Direct losses

Indirect losses

Immediate consequences

Short run consequences

Long run consequences

Physical injury of residents

Trading becomes lower


Reducing the human capital because many people died

Increasing in the government expenditures

Change in the pattern of investment

Pollution of the water resources as a result of destroying some structures (e.g. refineries, powerhouse, …)

Increasing in the demand of loan for consuming reasons and not for investment


Damage to the structures and infrastructures

Unwilling increasing in investment

Changing in the value of lands and assets

Many people being homeless

Depression in industries and business

Losing in the level of income, capital and private savings

In figure 1 the conceptual model illustrates how natural hazard insurance affects the sectors and improve the country’s situation ability to face with hazards.
Figure 1: the conceptual model




Household: in the case of earthquake, household loses its assets, incomes and almost always becomes unemployed. While by powerful, developed insurance companies there will be no worries about the wealth and declining in the level of welfare.
Government: in the current situation that the role of earthquake insurance is trimmed, government interferes after the earthquake to help victims, therefore, its expenditure will increased explosively. If insurance companies act strongly, the role of government will be as a reinsurer and support insurance companies. Government can also support low-income groups to pay their premium.
Standardization construction of buildings: in the long run the earthquake insurance will lead to standard construction, because by considering higher premium for unsecure structures construction engineers will be forced to build standard and safe building.
Crisis management: for managing crisis, it is essential to have accurate planning beforehand. Building safe structures is the indirect impact of insurance that can lead to good crisis management.
Evolution in the building technology: many factors such as the location of structures, age of the building, quality of supervision and material’s quality can introduce how much vulnerable the structure is against earthquake. Therefore, insurance experts will force the engineers to build the structures safe and far from faults that end to the secured buildings.



In order to studying the behavior of sectors for making appropriate suggestions, it is useful to separate demand and supply sides. In the demand side, household and business, should be encouraged to buy policies by giving them information about the risk of earthquake on their wealth and lives. The other solution is regulating rules for compulsory insurance similar to the third party insurance of cars. In the supply side, low liquidity and cash flow is the reason for undeveloped insurance industry. To make the industry more effective, problems such as statistics and pricing, adverse selection, risk distribution and estimating the exact loss which was caused by the quake should be solved. By compulsory insurance the cash flow will be pumped in to the insurance industry and the number of skilled experts working in the industry will increase to make evolution and the industry will be developed. As a result of a developed insurance industry, before earthquake happens, the structures will be built due to standard instructions and the amount of loss will decrease defiantly.



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