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Risk selection in natural disaster insurance

Mario Jametti () and Thomas von Ungern-Sternberg ()
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Thomas von Ungern-Sternberg: Université de Lausanne

No 2009/6, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: It is widely recognized that market failure prevents efficient risk sharing in natural disaster insurance, leading to several public-private partnership arrangements across the globe. We argue that risk selection, a situation where the public partner insures the majority of high risk agents, is potentially an important issue. To illustrate our concerns we build a simple model of reinsurance in a natural disaster insurance market. We show that risk selection is a likely equilibrium outcome and discuss the policy options available. The model is based on the French institutional setup and describes well the stylized facts. The policies implemented by the French government correspond to the ones we identify to alleviate risk selection. We also present two alternative public-private partnership setting that deal effectively with risk selection; hurricane insurance in Florida and catastrophe insurance in Spain.

Keywords: Risk selection; natural disaster; property insurance; reinsurance. (search for similar items in EconPapers)
JEL-codes: G22 L11 Q54 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009
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Journal Article: Risk Selection in Natural-Disaster Insurance (2010) Downloads
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