A Disaster Under-(Re)Insurance Puzzle: Home Bias in Disaster Risk-Bearing

Hiro Ito and Robert McCauley

IMF Economic Review, 2022, vol. 70, issue 4, No 4, 735-772

Abstract: Abstract We examine disaster reinsurance from the perspective of international risk-sharing. We find that losses from disasters are shared internationally to a generally very limited extent, unlike what the theory of international risk-sharing suggests. We propose a new dataset of cross-border reinsurance payments for 93 disasters of 44 economies in 1982–2017. Combining these balance of payments data with industry data, we find that the lack of disaster risk-sharing through international reinsurance results from low participation in primary insurance as well as limited use of reinsurance. Regression analysis finds that countries with higher levels of economic or financial development tend to insure a larger share of disaster losses while proxies for disaster myopia are associated with less insurance. Regarding the share of insured losses that is internationally reinsured, small size and de facto financial integration tend to raise the reinsurance share, while high levels of external wealth and low foreign firm presence in insurance are associated with less reinsurance. Advanced economies with little fiscal space that provide ex-post government disaster insurance without international reinsurance could experience disaster risk morphing into financial risk.

JEL-codes: F32 G15 G22 Q54 (search for similar items in EconPapers)
Date: 2022
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Working Paper: A disaster under-(re)insurance puzzle: Home bias in disaster risk-bearing (2019)
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DOI: 10.1057/s41308-022-00172-w

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