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Settling insurance claims with cash or repair and housing market recovery after an earthquake

Author

Listed:
  • Cuong Nguyen

    (Reserve Bank of New Zealand)

  • Ilan Noy

    (Victoria University of Wellington)

  • Dag Einar Sommervoll

    (Norwegian University of Life Sciences and NTNU Trondheim Business School)

  • Fang Yao

    (Bank of Ireland)

Abstract

On the 22nd of February 2011, most houses in the city of Christchurch in New Zealand were damaged by an earthquake. Atypically for an earthquake, practically all were insured. We ask whether the way insurance claims were settled - in cash or through a managed repair program - was instrumental in mitigating the earthquake’s impact on the housing market. We use a genetic algorithm, which improves on a standard hedonic model, and identify the dynamics of the housing market in the city. We use four data sets: Housing market transactions, earthquake insurance claims paid by the public insurer, building consents issued by the local authority, and shake-maps measuring the intensity of the seismic shock. We find a negative correlation between insurance cash payouts and house prices after the earthquake, at the local level. We uncover evidence that suggests that the mechanism behind this result is that some damaged houses, for which claims were provided in cash, were not actually fixed. In contrast, damages that were actively repaired by the insurer did not lead to any relative deterioration in prices. This difference in the performance of the housing market post-disaster should be considered when insurers and their regulators decide how to settle claims in future disaster events.

Suggested Citation

  • Cuong Nguyen & Ilan Noy & Dag Einar Sommervoll & Fang Yao, 2023. "Settling insurance claims with cash or repair and housing market recovery after an earthquake," Economics of Disasters and Climate Change, Springer, vol. 7(1), pages 117-134, March.
    • Handle: RePEc:spr:ediscc:v:7:y:2023:i:1:d:10.1007_s41885-022-00122-w
    DOI: 10.1007/s41885-022-00122-w
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    References listed on IDEAS

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