Equilibrium in natural catastrophe insurance market under disaster-resistant technologies, financial innovations and government interventions

Yang-Che Wu

Insurance: Mathematics and Economics, 2020, vol. 95, issue C, 116-128

Abstract: Natural disasters increase in number and severity. Studies have shown the failure of the catastrophe insurance market by listing many causes or through developing economic models (Charpentier and Le Maux, 2014; Kousky and Cooke, 2012; Ibragimov et al., 2009). However, they have not considered the effect of the following factors on market equilibrium: advanced disaster-resistant technologies used by insureds, alternative financial innovations employed by insurers, and various disaster policies that are implemented by governments. To fill this gap, this study examines how these three factors affect the market equilibrium by changing the supply of, and demand for insurance and determines which factor(s) contributes to the market equilibrium. Furthermore, we derive the formula of position size which gives criteria for selecting index-based contracts. Overall annual numbers and insured losses of catastrophes are collected by peril type and by occurrence region listed in Sigma, which is issued by Swiss Re annually. The comparative static equilibrium analysis demonstrates that the improvement of market equilibrium is significant at low level of loss correlation in all cases. The empirical findings give insurers good references for business and geographical diversification in portfolio of catastrophe insurance policies.

Keywords: Catastrophe insurance; Market equilibrium; Insurance premium subsidy; Disaster bailout; Index-based contract (search for similar items in EconPapers)
JEL-codes: G22 G32 H20 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:95:y:2020:i:c:p:116-128

DOI: 10.1016/j.insmatheco.2020.08.006

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