Why Do Few Homeowners Insure Against Natural Catastrophe Losses?

Insurance has been suggested as a policy instrument that can help in managing the rising economic cost of natural catastrophes. Evidence, however, shows that many homeowners do not insure their homes against natural catastrophes and tend to depend on (unreliable) disaster aid. This paper surveys the economics, insurance and psychology literature to explain why few homeowners insure against natural catastrophes. The paper covers the relevant theoretical approaches as well as the available empirical evidence and possible policy measures.