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Insurance and catastrophes

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  • Richard Zeckhauser

    (Kennedy School of Government, Harvard University, 79 Kennedy St. 02138 Cambridge MA)

Abstract

Catastrophes provide a principal justification for insurance. Traditional conceptions of catastrophes miss three critical elements. (1) Many catastrophes—the liability revolution in the United States, for example—are not bolts from the blue. Rather, they develop over many years and result from human activity. (2) Conventional, experiencedbased models for assessing losses often smudge the distinction, so critical for catastrophes, between probability and magnitude of loss. (3) Normal insurance contracts, with heavy copayments for small losses but little charge at the margin for large ones, perform poorly when the insured can tradeoff probability and size of loss—a phenomenon we label distribution distortion. The structures of optimal insurance contracts are assessed. The Geneva Papers on Risk and Insurance Theory (1995) 20, 157–175. doi:10.1007/BF01258392

Suggested Citation

  • Richard Zeckhauser, 1995. "Insurance and catastrophes," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 20(2), pages 157-175, December.
    • Handle: RePEc:pal:genrir:v:20:y:1995:i:2:p:157-175
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    Cited by:

    1. Dobes Leo & Jotzo Frank & Stern David I., 2014. "The Economics of Global Climate Change: A Historical Literature Review," Review of Economics, De Gruyter, vol. 65(3), pages 281-320, December.
    2. Patricia Born & W. Viscusi, 2006. "The catastrophic effects of natural disasters on insurance markets," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 55-72, September.
    3. Henri Loubergé, 1998. "Risk and Insurance Economics 25 Years After," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 23(4), pages 540-567, October.
    4. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. K. Goda & H. P. Hong, 2008. "Implied Preference for Seismic Design Level and Earthquake Insurance," Risk Analysis, John Wiley & Sons, vol. 28(2), pages 523-537, April.
    6. Fan Liu, 2019. "Does Identity Theft Insurance Undermine Risk Perceptions and Increase Risky Behavioral Intentions?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(8), pages 926-935, August.
    7. Louis Eeckhoudt & Philippe Godfroid, 1998. "The market value of preventive activities: A contingent-claims approach," Journal of Economics, Springer, vol. 68(1), pages 27-38, February.
    8. Walker Douglas M & Jackson John D, 2009. "Katrina and the Gulf States Casino Industry," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 4(2), pages 1-17, April.
    9. Fabrice Roth, 1998. "Structures de propriété, pouvoir discrétionnaire managérial et choix d'activité dans l'assurance dommages en France," Revue Finance Contrôle Stratégie, revues.org, vol. 1(1), pages 169-194, March.

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