Natural Disasters: Exposure and Underinsurance[Catastrophes naturelles : exposition et sous-assurance]

Insurance coverage against natural disasters remains low in many exposed areas. Limited insurance supply is commonly identified as a primary factor causing low insurance coverage. The French overseas departments provide an unusual combination of a well-developed natural disasters insurance supply in highly exposed regions. Indeed, the French natural disasters insurance system is guaranteed by the French government; first foreseen for continental France only, it was extended to overseas departments after Hurricane Hugo in 1989, in a state of emergency. This situation enables to analyze the determinants of insurance coverage on the demand side. Using unique household-level micro-data, I estimate a semi-structural model of insurance market which had not been empirically tested. The structural approach enables to show that underinsurance in the French overseas departments is neither due to perception biases nor to unaffordable insurance, but mainly to uninsurable housing and to anticipated assistance, which crowds out insurance. Individual insurance decision is impacted by neighbors' insurance choices via peer effects and via neighborhood eligibility for assistance.