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Natural Catastrophe Insurance: When Should the Government Intervene?

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  • Arthur Charpentier

    () (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique, CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)

  • Benoît Le Maux

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes. In contrast to conventional models of insurance, the insurer has a non-zero probability of insolvency which depends on the distribution of the risks, the premium rate, and the amount of capital in the company. When the insurer is insolvent, each loss reduces the indemnity available to the victims, thus generating negative pecuniary externalities. Our model shows that government-provided insurance will be more attractive in terms of expected utility, as it allows these negative pecuniary externalities to be spread equally among policyholders. However, when heterogeneous risks are introduced, a government program may be less attractive in safer areas, which could yield inefficiency if insurance ratings are not chosen appropriately.

Suggested Citation

  • Arthur Charpentier & Benoît Le Maux, 2010. "Natural Catastrophe Insurance: When Should the Government Intervene?," Working Papers hal-00536925, HAL.
  • Handle: RePEc:hal:wpaper:hal-00536925 Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00536925v2
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    References listed on IDEAS

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    Keywords

    Insurance; Strong Nash equilibrium; Market Failure; Externalities; Ruin; Natural Catastrophe; Government intervention;

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