A Real-Options Approach to Post-Hurricane Loss Valuation of Damage Property: Rebuild or Repair?

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Asia-Pacific Journal of Risk and Insurance




In this paper, we investigate the rebuild or repair decision that property owners face after damages caused by catastrophic hurricanes such as Katrina in New Orleans. In particular, we consider how the degree of risk aversion and uncertainty affect the decision-making process. A theoretical model is developed using the real-options framework of Dixit and Pindyck (1994). According to the model, the decision to rebuild a property is reached much later when there is a high degree of uncertainty over future social costs and a high discount rate. We demonstrate these effects using simulations with actual numbers from Hurricane Katrina.