Catastrophe risk sharing and public-private partnerships: From natural disasters to terrorism

Nathalie de Marcelis-Warin and Erwann Michel-Kerjan
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Nathalie de Marcelis-Warin: CIRANO - Montréal

Working Papers from HAL

Abstract: Recent extreme events showed how insurers, deprived of reinsurance capacity at an affordable price, could decide to stop covering for specific extreme events and rapidly let people and firms uncovered. Developing public-private partnerships could constitute one of the most appealing ways to solve the problem of financing the consequences of those extremes events by taking advantage of strengths of both sectors. Catastrophic risks present, however, very specific characteristics which really challenge any traditional economic approach to analyse those issues. So as of today little has been done in the economic literature to reassess the role of public and private sectors with respect to making available protection to victims as well as better understanding how those risks are effectively shared between all partners in those partnerships. This paper aims to provide a partial answer by analysing policy issues related to risk sharing between insurers and a dedicated state-backed governmental reinsurer, who are part of a national partnership of insurance against extreme events. The insurance is mandatory with premium policy that is decided by Treasury. We show that a government can modulate its premium policy levied against insured to make the private insurers in the country participating in the partnership instead of leaving the market and then to adopt two different strategies: (1) to behave as a simple financial intermediary between insured and the public reinsurer so as the former supports the largest portion of the risks or (2) to conserve the largest part of risks to benefit from government incentives. National schemes for covering against natural hazards and those developed post 9/11 for emerging terrorism provide illustrations.

Keywords: Terrorism; Public-private partnership; Risk Sharing; Natural Disaster; Terrorisme; Partenariats public-privés; Partage de risques; Catastrophes naturelles (search for similar items in EconPapers)
Date: 2003
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