For insurance to play a key role in the management and financing of catastrophic risks,
we propose the following two guiding principles that are discussed in greater detail in
Kunreuther and Michel-Kerjan, 2011:
Principle 1 – Premiums Should Reflect Risk: Insurance premiums should be based
on risk to provide signals to individuals as to the hazards they face and to encourage
them to engage in cost-effective mitigation measures to reduce their vulnerability to
catastrophes. Risk-based premiums should also reflect the cost of capital insurers’ need ...
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