Evolutionary Stable Strategy for Postdisaster Insurance: Game Theory Approach

Mitigation of the financial impacts associated with natural disasters is becoming an urgent objective at both the national and international levels, as the rate and magnitude of natural disasters are continuing to increase. Using an evolutionary game theory approach, this paper aims to find an equilibrium profile of postdisaster insurance plans purchased by resident families and sold by insurance companies, as well as ex-postdisaster relief implemented by a government agency. This dynamic integrated assessment minimizes the total losses for the three aforementioned associated stakeholders, thus maximizing welfare within natural disaster host community systems. To this end, the authors determined a plausible set of actions and utility functions for the associated stakeholders. Also, they created a hypothetical sample of 1,000 resident families accounting for heterogeneous income levels, three insurance companies offering three unique insurance plans per company-each with different premium and coverage-and two different types of government compensation plans for postdisaster damage mitigation. The proposed model was implemented on the NetBeans IDE 7.4 platform using the Java programming language for a hypothetical case study. The results indicate that (1) resident families tend to prefer insurance plans with the lowest premium value and coverage; (2) insurance plans with the most comprehensive coverage experienced the least demand; and (3) the evolutionary stable strategy is an oscillating line of chosen plans and insurers as a result of the stochastic and dynamics nature of the factors associated with disaster management. Currently, the authors are working to develop the model further to better account for simultaneous actions by all stakeholders (not only resident families), population growth, changes in financial and income standards, integrating input from available natural hazard prediction software systems (e.g., HAZUS-MH), and continuous data. Ultimately, this evolutionary game theory model will be tested on post-Hurricane Katrina data representing real-life physical damage in Hancock County, Mississippi. (C) 2015 American Society of Civil Engineers.