Risk selection in natural disaster insurance
AbstractIt is widely recognized that market failure prevents efficient risk sharing in natural disaster insurance, leading to several public-private partnership arrangements across the globe. We argue that risk selection, a situation where the public partner insures the majority of high risk agents, is potentially an important issue. To illustrate our concerns we build a simple model of reinsurance in a natural disaster insurance market. We show that risk selection is a likely equilibrium outcome and discuss the policy options available. The model is based on the French institutional setup and describes well the stylized facts. The policies implemented by the French government correspond to the ones we identify to alleviate risk selection. We also present two alternative public-private partnership setting that deal effectively with risk selection; hurricane insurance in Florida and catastrophe insurance in Spain.
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Bibliographic InfoPaper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/6.
Length: 29 pages
Date of creation: 2009
Date of revision:
Risk selection; natural disaster; property insurance; reinsurance.;
Other versions of this item:
- Mario Jametti & Thomas von Ungern-Sternberg, 2010. "Risk Selection in Natural-Disaster Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(2), pages 344-364, June.
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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