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Risk selection in natural disaster insurance

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  • Mario Jametti

    ()
    (University of Lugano)

  • Thomas von Ungern-Sternberg

    ()
    (Université de Lausanne)

Abstract

It 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 Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/6.

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Length: 29 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/5/doc2009-6

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Keywords: Risk selection; natural disaster; property insurance; reinsurance.;

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  1. Lehmann, Hansjorg & Zweifel, Peter, 2004. "Innovation and risk selection in deregulated social health insurance," Journal of Health Economics, Elsevier, vol. 23(5), pages 997-1012, September.
  2. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
  3. Mario Jametti & Thomas von Ungern-Sternberg, 2004. "Disaster Insurance or a Disastrous Insurance – Natural Disaster Insurance in France," CESifo Working Paper Series 1303, CESifo Group Munich.
  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. Thomas von Ungern-Sternberg, 2009. "Hurricane Insurance in Florida," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 09.01, Université de Lausanne, Faculté des HEC, DEEP.
  6. Christian Gollier, 2005. "Some Aspects of the Economics of Catastrophe Risk Insurance," CESifo Working Paper Series 1409, CESifo Group Munich.
  7. Howard Kunreuther, 2006. "Reflections on U.S. Disaster Insurance Policy for the 21st Century," NBER Working Papers 12449, National Bureau of Economic Research, Inc.
  8. Yujing Shen & Randall P. Ellis, 2002. "How profitable is risk selection? A comparison of four risk adjustment models," Health Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 165-174.
  9. von Ungern-Sternberg, Thomas, 2004. "Efficient Monopolies: The Limits of Competition in the European Property Insurance Market," OUP Catalogue, Oxford University Press, number 9780199268818, September.
  10. Frame, David E., 2001. "Insurance and Community Welfare," Journal of Urban Economics, Elsevier, vol. 49(2), pages 267-284, March.
  11. Sean Nicholson & Kate Bundorf & Rebecca M. Stein & Daniel Polsky, 2003. "The Magnitude and Nature of Risk Selection in Employer-Sponsored Health Plans," NBER Working Papers 9937, National Bureau of Economic Research, Inc.
  12. Daniel Polsky & Sean Nicholson, 2004. "Why Are Managed Care Plans Less Expensive: Risk Selection, Utilization, or Reimbursement?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(1), pages 21-40.
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