Collaborative Research: An Interdisciplinary Approach to Modeling Multiple Stakeholder Decision-Making to Reduce Regional Natural Disaster Risk

Natural disasters create enormous costs for the United States. Despite many private sector and public policy efforts over decades, the current system of managing natural disaster risk is not working well for the government, the insurance industry, or homeowners. Previous research has resulted in extensive knowledge about how individuals and organizations make risk-related decisions, the strategic behavior of individual insurers and the insurance market as a whole, as well as natural disaster risk itself and ways to physically reduce it. Nevertheless, efforts to understand how the choices of the different participating groups or stakeholders interact as a 'system' have been limited. The proposed project will result in a new framework of interacting mathematical models that can be used to better understand, design, and evaluate government natural disaster risk management policies, such as providing funds to help homeowners strengthen their homes, requiring homeowners to buy natural disaster insurance, or offering to buy high-risk homes. By supporting improved design and evaluation of public policies, the project will help the country better manage its risk. By considering the individual, sometimes competing stakeholder points-of-view up front, as an integral part of the analysis, the new framework will make it easier to identify those win-win system-wide solutions that are most likely to be put into action and to be effective. The framework is designed to be consistent with the 'whole community' approach promoted by the Federal Emergency Management Agency (FEMA), which encourages involving all parts of the community in helping to address the challenge. Engaging representatives of the relevant government agencies and insurance and home building industries as partners at the beginning of the project will help ensure that the research offers usable results that can be put into practice as quickly and effectively as possible. Graduate and undergraduate research assistants, including women and underrepresented minorities, will participate in the research, and the researchers will incorporate the results into their courses and new Ph.D. programs at their universities. The project will result in a leap forward in understanding the overall behavior of the natural disaster risk management system in the U.S., thus helping provide the knowledge needed to improve it.

To achieve these benefits, this project will develop a new framework that will include five interacting mathematical models of (1) government decisions about what regulations to introduce and/or incentives to offer,(2) insurer decisions about what to charge for insurance policies and what reinsurance to buy, (3) competition among insurers, (4) individual homeowner decisions about whether to buy insurance and/or strengthen their homes, and (5) regional natural disaster losses. The project will make use of an existing first version of the framework that includes interacting insurer-homeowner and loss models but, will improve on that effort substantially through five tasks: (1) identifying categories of homeowner decision types and a homeowner decision model that is based on data describing how homeowners actually make these decisions in real life, (2) extending the framework to include the way decisions and information change over time, (3) including situations in which the stakeholders do not have perfect or the same information, (4) developing and incorporating a model of government decisions, and (5) demonstrating the framework in a full-scale case study applied to residential hurricane risk in North Carolina.