IDEAS home Printed from https://ideas.repec.org/a/spr/italej/v10y2024i1d10.1007_s40797-022-00210-6.html
   My bibliography  Save this article

A Public–Private Insurance Model for Disaster Risk Management: An Application to Italy

Author

Listed:
  • Selene Perazzini

    (University of Brescia)

  • Giorgio Gnecco

    (IMT School for Advanced Studies Lucca)

  • Fabio Pammolli

    (Politecnico di Milano)

Abstract

This paper proposes a public–private insurance model for earthquakes and floods in Italy in which the insurer and the government co-operate in risk financing. Our model departs from the existing literature by describing an insurance scheme intended to relieve the financial burden that natural events place on governments, while at the same time assisting individuals and protecting the insurance business. Hence, the business aims at maximizing social welfare rather than profits. Given the limited amount of data available on natural risks, expected losses per individual are estimated through risk-modeling. In order to evaluate the insurer’s loss profile, spatial correlation among insured assets is included. Our findings suggest that, when not supported by the government, private insurance might either financially over-expose the insurer or set premiums so high that individuals would fail to purchase policies. This evidence is stronger for earthquake risks, but it is considerable for floods too. We found that jointly managing the two perils alleviates the burden on public capitals by lowering the amount of capitals required and by keeping the probability of additional capital injections into the insurance reserves relatively low.

Suggested Citation

  • Selene Perazzini & Giorgio Gnecco & Fabio Pammolli, 2024. "A Public–Private Insurance Model for Disaster Risk Management: An Application to Italy," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 10(1), pages 225-267, March.
  • Handle: RePEc:spr:italej:v:10:y:2024:i:1:d:10.1007_s40797-022-00210-6
    DOI: 10.1007/s40797-022-00210-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40797-022-00210-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s40797-022-00210-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Daniel Marshall, 2018. "An Overview of the California Earthquake Authority," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 21(1), pages 73-116, March.
    2. Joshua D. Woodard & Gary D. Schnitkey & Bruce J. Sherrick & Nancy Lozano‐Gracia & Luc Anselin, 2012. "A Spatial Econometric Analysis of Loss Experience in the U.S. Crop Insurance Program," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 261-286, March.
    3. Kousky, Carolyn & Michel-Kerjan, Erwann O. & Raschky, Paul A., 2018. "Does federal disaster assistance crowd out flood insurance?," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 150-164.
    4. Charpentier, Arthur & Le Maux, Benoît, 2014. "Natural catastrophe insurance: How should the government intervene?," Journal of Public Economics, Elsevier, vol. 115(C), pages 1-17.
    5. Cooper, Russell & Hayes, Beth, 1987. "Multi-period insurance contracts," International Journal of Industrial Organization, Elsevier, vol. 5(2), pages 211-231.
    6. Government of Mexico & World Bank, 2012. "Improving the Assessment of Disaster Risks to Strengthen Financial Resilience," World Bank Publications - Reports 26784, The World Bank Group.
    7. Howard Kunreuther & Mark Pauly, 2006. "Rules Rather Than Discretion: Lessons from Hurricane Katrina," NBER Working Papers 12503, National Bureau of Economic Research, Inc.
    8. Howard Kunreuther & Mark Pauly, 2004. "Neglecting Disaster: Why Don't People Insure Against Large Losses?," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 5-21, January.
    9. Erwann O. Michel-Kerjan, 2010. "Catastrophe Economics: The National Flood Insurance Program," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 165-186, Fall.
    10. Carolyn Kousky & Roger Cooke, 2012. "Explaining the Failure to Insure Catastrophic Risks," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 37(2), pages 206-227, April.
    11. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    12. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    13. Heiko Apel & Annegret Thieken & Bruno Merz & Günter Blöschl, 2006. "A Probabilistic Modelling System for Assessing Flood Risks," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 38(1), pages 79-100, May.
    14. James Chivers & Nicholas E. Flores, 2002. "Market Failure in Information: The National Flood Insurance Program," Land Economics, University of Wisconsin Press, vol. 78(4), pages 515-521.
    15. Eugene Gurenko & Rodney Lester & Olivier Mahul & Serap Oguz Gonulal, 2006. "Earthquake Insurance in Turkey : History of the Turkish Catastrophe Insurance Pool," World Bank Publications - Books, The World Bank Group, number 7142.
    16. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    17. Justin Gallagher, 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 206-233, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Konstantinos Papoulakos & Theano Iliopoulou & Panayiotis Dimitriadis & Dimosthenis Tsaknias & Demetris Koutsoyiannis, 2025. "Spatiotemporal clustering of streamflow extremes and relevance to flood insurance claims: a stochastic investigation for the contiguous USA," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 121(1), pages 447-484, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Selene Perazzini, 2020. "Public-Private Partnership in the Management of Natural Disasters: A Review," Papers 2006.05845, arXiv.org.
    2. Thomas Holzheu & Ginger Turner, 2018. "The Natural Catastrophe Protection Gap: Measurement, Root Causes and Ways of Addressing Underinsurance for Extreme Events†," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(1), pages 37-71, January.
    3. Selene Perazzini & Giorgio Stefano Gnecco & Fabio Pammolli, 2020. "A Public-Private Insurance Model for Natural Risk Management: an Application to Seismic and Flood Risks on Residential Buildings in Italy," Papers 2006.05840, arXiv.org.
    4. Osberghaus, Daniel & Reif, Christiane, 2021. "How do different compensation schemes and loss experience affect insurance decisions? Experimental evidence from two independent and heterogeneous samples," Ecological Economics, Elsevier, vol. 187(C).
    5. Matthew Gibson & Jamie T. Mullins & Alison Hill, 2019. "Climate Risk and Beliefs: Evidence from New York Floodplains," Department of Economics Working Papers 2019-02, Department of Economics, Williams College.
    6. Xiao Lin, 2020. "Risk awareness and adverse selection in catastrophe insurance: Evidence from California’s residential earthquake insurance market," Journal of Risk and Uncertainty, Springer, vol. 61(1), pages 43-65, August.
    7. Ginger Turner & Farah Said & Uzma Afzal, 2014. "Microinsurance Demand After a Rare Flood Event: Evidence From a Field Experiment in Pakistan," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(2), pages 201-223, April.
    8. Alexis Louaas & Pierre Picard, 2021. "Optimal insurance coverage of low-probability catastrophic risks," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(1), pages 61-88, March.
    9. Justin Contat & Carrie Hopkins & Luis Mejia & Matthew Suandi, 2024. "When climate meets real estate: A survey of the literature," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 52(3), pages 618-659, May.
    10. Stephane Hallegatte, 2017. "A Normative Exploration of the Link Between Development, Economic Growth, and Natural Risk," Economics of Disasters and Climate Change, Springer, vol. 1(1), pages 5-31, June.
    11. Botzen, W.J. Wouter & de Boer, Joop & Terpstra, Teun, 2013. "Framing of risk and preferences for annual and multi-year flood insurance," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 357-375.
    12. Kendra Marcoux & Katherine R. H. Wagner, 2023. "Fifty Years of U.S. Natural Disaster Insurance Policy," CESifo Working Paper Series 10431, CESifo.
    13. Randy E. Dumm & David L. Eckles & Charles Nyce & Jacqueline Volkman-Wise, 2020. "The representative heuristic and catastrophe-related risk behaviors," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 157-185, April.
    14. Frimpong, Eugene & Petrolia, Daniel & Harri, Ardian, 2018. "Does the Community Rating System Work? Evidence from Two Gulf Coast States," Working Papers 273014, Mississippi State University, Department of Agricultural Economics.
    15. Stefan Borsky & Hannah Hennighausen, 2022. "Public Flood Risk Mitigation and the Homeowner’s Insurance Demand Response," Land Economics, University of Wisconsin Press, vol. 98(4), pages 537-559.
    16. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    17. W.J. Wouter Botzen & Howard Kunreuther & Erwann Michel-Kerjan, 2015. "Divergence between individual perceptions and objective indicators of tail risks: Evidence from floodplain residents in New York City," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 10(4), pages 365-385, July.
    18. Mankaï, Selim & Marchand, Sébastien & Le, Ngoc Ha, 2024. "Valuing insurance against small probability risks: A meta-analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 109(C).
    19. Marielle Brunette & Stephane Couture, 2007. "Effects of Public Compensation for Disaster Damages on Private Insurance and Forest Management Decisions," Working Papers - Cahiers du LEF 2007-06, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.
    20. Carolyn Kousky & Howard Kunreuther, 2018. "Risk Management Roles of the Public and Private Sector," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 21(1), pages 181-204, March.

    More about this item

    Keywords

    Disaster risk management; Insurance; Earthquakes; Floods; Italy;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:italej:v:10:y:2024:i:1:d:10.1007_s40797-022-00210-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.