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Natural disaster insurance and the equity-efficiency trade-off

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  • Pierre Picard

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

Abstract

This paper investigates the role of private insurance in the prevention and mitigation of natural disasters. We characterize the equity-efficiency trade-off faced by the policymakers under imperfect information about individual prevention costs. It is shown that a competitive insurance market with actuarial ratemaking and compensatory tax-subsidy transfers is likely to dominate regulated uniform insurance pricing rules or state-funded assistance schemes. The model illustrates how targeted tax cuts on insurance contracts can improve the incentives to prevention, while compensating the individuales with high prevention costs. The paper also highlights the complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdictions where risk management plans are enforced

Suggested Citation

  • Pierre Picard, 2005. "Natural disaster insurance and the equity-efficiency trade-off," Working Papers hal-00243028, HAL.
    • Handle: RePEc:hal:wpaper:hal-00243028
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00243028
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    1. Laure Latruffe & Pierre Picard, 2005. "Assurance des catastrophes naturelles : faut-il choisir entre prévention et solidarité ?," Annals of Economics and Statistics, GENES, issue 78, pages 33-56.
    2. Browne, Mark J & Hoyt, Robert E, 2000. "The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 291-306, May.
    3. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-187, May.
    4. Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
    5. Finkelstein, Amy & Poterba, James & Rothschild, Casey, 2009. "Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities," Journal of Financial Economics, Elsevier, vol. 91(1), pages 38-58, January.
    6. Lewis, Tracy & Nickerson, David, 1989. "Self-insurance against natural disasters," Journal of Environmental Economics and Management, Elsevier, vol. 16(3), pages 209-223, May.
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