Disaster Insurance or a Disastrous Insurance – Natural Disaster Insurance in France
We model natural disaster insurance in France. We explicitly take into account the main institutional features of the system, such as the uniform premium rate in both high and low risk regions and the existence of a state reinsurance company. Our model indicates that the institutional set-up is fundamentally flawed. We find that the market is likely to lead to “specialist” equilibria, where insurers specialize in serving either high or low risk regions. As a result the reinsurance company, which offers cover to all insurers at the same price, is likely to suffer from a portfolio with mainly “bad” risks. We show that increasing the premium rate customers have to pay, a policy undertaken by the French authorities, will not necessarily solve these problems and comes at a high cost to the final consumer (and taxpayer).
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- 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.
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