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Catastrophe risk sharing and public-private partnerships : From natural disasters to terrorism

Author

Listed:
  • Nathalie De Marcelis-Warin

    (CIRANO - Montréal)

  • Erwann Michel-Kerjan

    (CECO - Laboratoire d'économétrie de l'École polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

Abstract

Recent extreme events showed how insurers, deprived of reinsurance capacity at an affordable price, could decide to stop covering for specific extreme events and rapidly let people and firms uncovered. Developing public-private partnerships could constitute one of the most appealing ways to solve the problem of financing the consequences of those extremes events by taking advantage of strengths of both sectors. Catastrophic risks present, however, very specific characteristics which really challenge any traditional economic approach to analyse those issues. So as of today little has been done in the economic literature to reassess the role of public and private sectors with respect to making available protection to victims as well as better understanding how those risks are effectively shared between all partners in those partnerships. This paper aims to provide a partial answer by analysing policy issues related to risk sharing between insurers and a dedicated state-backed governmental reinsurer, who are part of a national partnership of insurance against extreme events. The insurance is mandatory with premium policy that is decided by Treasury. We show that a government can modulate its premium policy levied against insured to make the private insurers in the country participating in the partnership instead of leaving the market and then to adopt two different strategies: (1) to behave as a simple financial intermediary between insured and the public reinsurer so as the former supports the largest portion of the risks or (2) to conserve the largest part of risks to benefit from government incentives. National schemes for covering against natural hazards and those developed post 9/11 for emerging terrorism provide illustrations.

Suggested Citation

  • Nathalie De Marcelis-Warin & Erwann Michel-Kerjan, 2003. "Catastrophe risk sharing and public-private partnerships : From natural disasters to terrorism," Working Papers hal-00242981, HAL.
  • Handle: RePEc:hal:wpaper:hal-00242981
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00242981
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    References listed on IDEAS

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    1. Roland, Gerard & Verdier, Thierry, 2003. "Law enforcement and transition," European Economic Review, Elsevier, vol. 47(4), pages 669-685, August.
    2. Howard Kunreuther & Erwann Michel-Kerjan & Beverly Porter, 2003. "Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism," NBER Working Papers 10179, National Bureau of Economic Research, Inc.
    3. 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.
    4. Ganderton, Philip T. & Brookshire, David S. & McKee, Michael & Stewart, Steve & Thurston, Hale, 2000. "Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 271-289, May.
    5. G. Dionne & N. Doherty & N. Fombaron, 2000. "Adverse Selection in Insurance Markets," THEMA Working Papers 2000-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    6. Priest, George L, 1996. "The Government, the Market, and the Problem of Catastrophic Loss," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 219-237, May.
    7. Nathalie de Marcellis-Warin & Erwann Michel-Kerjan, 2001. "The Public-Private Sector Risk-Sharing in the French Insurance "Cat. Nat. System"""," CIRANO Working Papers 2001s-60, CIRANO.
    8. Joseph E. Stiglitz, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 407-430.
    9. Howard Kunreuther, 1997. "Rethinking Society's Management of Catastrophic Risks*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 22(2), pages 151-176, April.
    10. Serge Magnan, 1995. "Catastrophe Insurance System in France," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 20(4), pages 474-480, October.
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    Cited by:

    1. Erwann Michel-Kerjan, 2003. "Terrorisme à grande échelle partage de risques et politiques publiques," Revue d'économie politique, Dalloz, vol. 113(5), pages 625-648.

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