Insuring against earthquakes: simulating the cost‐effectiveness of disaster preparedness

Ex‐ante measures to improve risk preparedness for natural disasters are generally considered to be more effective than ex‐post measures. Nevertheless, most resources are allocated after an event in geographical areas that are vulnerable to natural disasters. This paper analyses the cost‐effectiveness of ex‐ante adaptation measures in the wake of earthquakes and provides an assessment of the future role of private and public agencies in disaster risk management. The study uses a simulation model approach to evaluate consumption losses after earthquakes under different scenarios of intervention. Particular attention is given to the role of activity diversification measures in enhancing disaster preparedness and the contributions of (targeted) microcredit and education programmes for reconstruction following a disaster. Whereas the former measures are far more cost‐effective, missing markets and perverse incentives tend to make ex‐post measures a preferred option, thus occasioning underinvestment in ex‐ante adaptation initiatives.