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Natural Disaster Insurance and the Equity-Efficiency Trade-Off

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  • Pierre Picard

Abstract

This article investigates the role of private insurance in the prevention and mitigation of natural disasters. We characterize the equity-efficiency trade-off faced by the policymakers under imperfect information about individual prevention costs. It is shown that a competitive insurance market with actuarial rate making and compensatory tax-subsidy transfers is likely to dominate regulated uniform insurance pricing rules or state-funded assistance schemes. The model illustrates how targeted tax cuts on insurance contracts can improve the incentives to prevention while compensating individuals with high prevention costs. The article highlights the complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdictions where risk management plans are enforced. Copyright The Journal of Risk and Insurance, 2008.

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Bibliographic Info

Article provided by The American Risk and Insurance Association in its journal Journal of Risk & Insurance.

Volume (Year): 75 (2008)
Issue (Month): 1 ()
Pages: 17-38

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Handle: RePEc:bla:jrinsu:v:75:y:2008:i:1:p:17-38

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References

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  1. Lewis, Tracy & Nickerson, David, 1989. "Self-insurance against natural disasters," Journal of Environmental Economics and Management, Elsevier, vol. 16(3), pages 209-223, May.
  2. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-87, May.
  3. Laure LATRUFFE & Pierre PICARD, 2005. "Assurance des catastrophes naturelles : faut-il choisir entre prévention et solidarité ?," Annales d'Economie et de Statistique, ENSAE, issue 78, pages 33-56.
  4. Browne, Mark J & Hoyt, Robert E, 2000. " The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 291-306, May.
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Cited by:
  1. Gilberto Turati & Luigi Buzzacchi, 2009. "Optimal risk allocation in the provision of local public services: can a private insurer be better than a public mutual fund?," Working Papers 2009/21, Institut d'Economia de Barcelona (IEB).
  2. Céline Grislain-Letrémy & Bertrand Villeneuve, 2011. "Natural and Industrial Disasters : Land Use and Insurance," Working Papers 2011-32, Centre de Recherche en Economie et Statistique.
  3. Luigi Buzzacchi & Gilberto Turati, 2009. "Collective Risks in Local Administrations: Can a Private Insurer Be Better than a Public Mutual Fund?," Working papers 3, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  4. Michio Naoi & Miki Seko & Kazuto Sumita, 2010. "Community Rating, Cross Subsidies and Underinsurance: Why so many Households in Japan do not Purchase Earthquake Insurance," The Journal of Real Estate Finance and Economics, Springer, vol. 40(4), pages 544-561, May.
  5. Swenja Surminski & Delioma Oramas-Dorta, 2013. "Do flood insurance schemes in developing countries provide incentives to reduce physical risks?," Grantham Research Institute on Climate Change and the Environment Working Papers 119, Grantham Research Institute on Climate Change and the Environment.
  6. Swenja Surminski & Jillian Eldridge, 2014. "Flood insurance in England – an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," Grantham Research Institute on Climate Change and the Environment Working Papers 144, Grantham Research Institute on Climate Change and the Environment.
  7. Céline Grislain-Letrémy & Sabine Lemoyne de Forges, 2011. "Coordinating Flood Insurance and Collective Prevention Policies: A Fiscal Federalism Perspective," Working Papers 2011-07, Centre de Recherche en Economie et Statistique.

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