Optimal insurance coverage of low-probability catastrophic risks

Alexis Louaas and Pierre Picard

The Geneva Risk and Insurance Review, 2021, vol. 46, issue 1, No 4, 88 pages

Abstract: Abstract Catastrophic risks are often characterised by a low probability, a high severity and a large number of affected individuals. Taking these specificities into account, we analyse the capacity of insurance contracts to provide coverage for those risks, independently from the market failures frequently observed in practice. On the demand side, we characterise individual preferences under which the willingness to pay for the coverage of large losses remains significant, although their occurrence probability is very small. On the supply side, the correlation between individual losses affects the insurance pricing through the insurers’ cost of capital. Analysing the interaction between demand and supply yields the key determinants of insurability and of a socially optimal risk sharing strategy.

Keywords: Disaster insurance; Catastrophic risk; Risk aversion; Capital costs (search for similar items in EconPapers)
JEL-codes: D81 D86 G22 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/s10713-020-00049-w

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