A disaster under-(re)insurance puzzle: Home bias in disaster risk-bearing

Hiro Ito and Robert McCauley

No 808, BIS Working Papers from Bank for International Settlements

Abstract: The losses from the 2011 earthquakes in Japan remained in Japan, while reinsurance spread the losses from that year’s New Zealand earthquake to the rest of the world.This paper finds that the Japanese case is more typical: losses from natural disasters are shared internationally to a generally very limited extent. This finding of home bias in disaster risk-bearing poses a puzzle of international risk-sharing. We decompose international risk-sharing into the portion of losses insured and the portion ofinsurance that is internationally re-insured. We find that the failure of international risk-sharing begins at home with low participation in insurance. Regression analysis points to economic development and institutional/legal quality as important determinants of insurance participation. We propose a new method to measure international reinsurance payments with balance of payments data. This method identifies for the first time the cross-border flow of reinsurance payments to 88 economies that experienced insured disasters in the 1985–2017 period. Regression analysis of these data points to small size and de facto financial integration as positively related to the reinsurance share, as one might expect. However, we also find that more internationally wealthy economies reinsure less, suggesting that net foreign assets substitute for international sharing of disaster risk. For advanced economies, a lack of international risk-sharing is correlated with a lack of fiscal space. Thus, the governments under more pressure to provide ex post government insurance through the budget have less room to manoeuvre to do so. At high levels of public debt, a lack of ex ante insurance can turn disaster risk into financial risk.

Keywords: international risk-sharing, earthquake insurance; reinsurance (search for similar items in EconPapers)
JEL-codes: F32 G15 G22 Q54 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2019-08
New Economics Papers: this item is included in nep-ias and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: A Disaster Under-(Re)Insurance Puzzle: Home Bias in Disaster Risk-Bearing (2022)
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