Insurance Against Catastrophe: Government Stimulation of Insurance Markets for Catastrophic Events
58 Pages Posted: 9 Feb 2013
Date Written: February 8, 2013
In the last decade one can identify several accidents which can be classified as large scale accidents of a catastrophic dimension. After such a catastrophe the compensation of victims is of crucial importance and governments often intervene in this compensation. However, the organization of government intervention in the compensation varies from one country to another and from one disaster to another. Governments intervene either because no satisfying solution is available in the private market or to fulfil the requirements of existing compensation schemes. Political pressure for such intervention may also be large. Consequently Governments may try to intervene to stimulate the insurability of catastrophic risks or to take over insurance functions when markets fail. There is a tendency in the last years to use such public-private partnerships more frequently.
The paper has analysed how such partnerships can work and in what way such intervention should be structured. It is argued that intervention should always be designed in accordance with criteria of economic efficiency to prevent that the intervention of the government amounts to a subsidy. This would not only be detrimental in terms of efficiency, but could also lead to problems with regard to state aid considerations. This paper delineates some conditions which have to be fulfilled to guarantee an efficient intervention. This theoretical framework serves to discuss the drawbacks on the one hand but also advantages on the other hand of government intervention to stimulate the reinsurability of catastrophic risks.
Keywords: catastrophe, government intervention, private insurance market, FEMA, mandatory comprehensive insurance, reinsurance, pooling, lander of last resort, insurability
JEL Classification: K32, K33, K13
Suggested Citation: Suggested Citation