Economics at your fingertips  

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

Abstract: 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)
Date: 2018-11-15
New Economics Papers: this item is included in nep-ias and nep-rmg
Note: View the original document on HAL open archive server:
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) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().

Page updated 2020-06-25
Handle: RePEc:hal:wpaper:hal-01924408