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Charity hazard - A real hazard to natural disaster insurance

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  • Paul Raschky

    ()

  • Hannelore Weck-Hannemann

    ()

Abstract

After the flooding in 2002 European governments provided billions of Euros of financial assistance to their citizens. Although there is no doubt that solidarity and some sort of assistance is reasonable, the question arises why these damages were not sufficiently insured. One explanation why individuals reject to obtain insurance cover against natural hazards is that they anticipate governmental and private aid. This problem became to be known as "charity hazard". The present paper gives an economic analysis of the institutional arrangements on the market for natural disaster insurances focusing on imperfections caused by governmental financial relief. It provides a theoretical explanation why charity hazard is a problem on the market for natural disaster insurances, in the way that it acts as an obstacle for the proper diffusion and therefore the establishment of natural hazard insurances. This paper provides a review of the scientific discussion on charity hazard, provides a theoretical analysis and points out the existing empirical problems regarding this issue.

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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2007-04.

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Length: 34
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:inn:wpaper:2007-04

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Keywords: natural hazard insurance; market failure; governmental assistance;

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References

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  1. Thomas A. Garrett & Russell S. Sobel, 2003. "The Political Economy of FEMA Disaster Payments," Economic Inquiry, Western Economic Association International, vol. 41(3), pages 496-509, July.
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Citations

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Cited by:
  1. Marielle Brunette & Laure Cabantous & Stéphane Couture & Anne Stenger, 2013. "The impact of governmental assistance on insurance demand under ambiguity: a theoretical model and an experimental test," Theory and Decision, Springer, vol. 75(2), pages 153-174, August.
  2. Céline Grislain-Letremy, 2013. "Natural Disters : Exposure and Underinsurance," Working Papers 2013-15, Centre de Recherche en Economie et Statistique.
  3. Osberghaus, Daniel, 2013. "Prospect theory, mitigation and adaptation to climate change," ZEW Discussion Papers 13-091, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Paul Raschky & Reimund Schwarze & Manijeh Schwindt & Ferdinand Zahn, 2013. "Uncertainty of Governmental Relief and the Crowding out of Flood Insurance," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 54(2), pages 179-200, February.
  5. Paul A. Raschky & Reimund Schwarze & Manijeh Schwindt & Ferdinand Zahn, 2010. "Uncertainty of Governmental Relief and the Crowding out of Insurance," Development Research Unit Working Paper Series 05-10, Monash University, Department of Economics.
  6. Reimund Schwarze & Gert G. Wagner, 2009. "Natural Hazards Insurance in Europe ? Tailored Responses to Climate Change Needed," Working Papers 2009-06, Faculty of Economics and Statistics, University of Innsbruck.
  7. Eduardo Cavallo & Ilan Noy, 2010. "The Aftermath of Natural Disasters: Beyond Destruction," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 11(2), pages 25-35, 07.
  8. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
  9. Paul A. RASCHKY, 2013. "Estimating the Effects of West Sumatra Public Asset Insurance Program on Short-Term Recovery after the September 2009 Earthquake," Working Papers DP-2013-35, Economic Research Institute for ASEAN and East Asia (ERIA).
  10. Grislain-Letrémy, Céline, 2013. "Natural Disasters: Exposure and Underinsurance," Economics Papers from University Paris Dauphine 123456789/13276, Paris Dauphine University.
  11. C. Grislain-Letrémy, 2013. "Natural Disasters: Exposure and Underinsurance," Documents de Travail de la DESE - Working Papers of the DESE g2013-12, Institut National de la Statistique et des Etudes Economiques, DESE.
  12. Leo Dobes & Bruce Chapman, 2011. "Financing Adaptation to Climate-Induced Retreat from Coastal Inundation and Erosion," CCEP Working Papers 1113, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  13. Andreas Richter & Jörg Schiller & Harris Schlesinger, 2014. "Behavioral insurance: Theory and experiments," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 85-96, April.
  14. David I. Stern & Frank Jotzo & Leo Dobes, 2013. "The Economics of Global Climate Change: A Historical Literature Review," CCEP Working Papers 1307, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.

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