Optimal insurance coverage of low probability-high severity risks
Alexis Louaas and
Pierre Picard ()
Additional contact information
Alexis Louaas: X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique
Working Papers from HAL
Catastrophic risks are often characterized by a low probability and a high severity. Taking these specificities into account, we analyze the intrinsic reasons for which catastrophic risks may be more or less insurable, independently from the market failures frequently observed in practice. On the demand side, we characterize 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. Analyzing 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)
New Economics Papers: this item is included in nep-ias and nep-rmg
Note: View the original document on HAL open archive server: https://hal-polytechnique.archives-ouvertes.fr/hal-01924408
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01924408
Access Statistics for this paper
More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().