Abstract
- A homeowner at risk for catastrophic damages to his home has a number of options available to minimize the expected costs of this damage and maximize his wealth; these costs include damages in excess of insurance coverage suffered due to such events as flooding, tornadic winds, earthquakes and hurricanes; the options available include structural home improvements beyond existing building codes, insurance of varying coverage and deductible and savings. A coastal homeowner at risk for hurricane wind damage, for example, attempts to maximize his expected wealth long-term while maintaining the value of his home. He weighs the cost and benefits of insurance and structural defensive purchases. We use home construction, insurance and structural improvement cost data to examine wealth effects over time for a homeowner "investing" in costly wind-damage defenses, insurance and low-risk savings. A set of decisions to maximize the homeowner’s wealth is proposed. We find that defensive measure expenditures maximize wealth only in the event of no insurance availability or extremely costly insurance.