Natural Catastrophe Insurance: When Should the Government Intervene?

Arthur Charpentier (1, 2) , Benoît Le Maux (2)

1 X-DEP-ECO - Département d'Économie de l'École Polytechnique
2 CREM - Centre de recherche en économie et management

This paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes. In contrast to conventional models of insurance, the insurer has a non-zero probability of insolvency which depends on the distribution of the risks, the premium rate, and the amount of capital in the company. When the insurer is insolvent, each loss reduces the indemnity available to the victims, thus generating negative pecuniary externalities. Our model shows that government-provided insurance will be more attractive in terms of expected utility, as it allows these negative pecuniary externalities to be spread equally among policyholders. However, when heterogeneous risks are introduced, a government program may be less attractive in safer areas, which could yield inefficiency if insurance ratings are not chosen appropriately.

Mots clés: Strong Nash equilibrium; Market Failure; Externalities; Ruin; Natural Catastrophe; Insurance; Government intervention

Domaines: Economies et finances

Arthur Charpentier, Benoît Le Maux. Natural Catastrophe Insurance: When Should the Government Intervene?. 2010. ⟨hal-00536925v2⟩