Catastrophe Risk-Sharing Decisions of Individuals, Insurer, and Government

50 Pages Posted: 13 Nov 2018 Last revised: 7 May 2020

See all articles by Ruo Jia

Ruo Jia

Department of Risk Management and Insurance, School of Economics, Peking University

Jieyu Lin

Tsinghua University - School of Economics & Management

Hanyang (Hans) Wang

Peking University - School of Economics

Date Written: April 26, 2020

Abstract

We develop a dynamic game model for efficient catastrophe risk-sharing that allows decision makers to derive optimal pricing, capital, and buying decisions in one equilibrium. Existing catastrophe insurance models focus on either the primary insurance market or the reinsurance market, thus involving one or two decision makers. Our model involves both markets and three decision makers: Individuals, a private insurer, and a centralized agency acting as reinsurer. We show that government reinsurance addresses the failure of the private catastrophe insurance market, increases individuals’ willingness to pay for catastrophe risk transfer, and represents a Pareto improvement on a competitive market with no reinsurance or with private reinsurance. The government’s trade-off between using catastrophe taxes and reinsurance premiums to fund
the program improves the social welfare through product quality, capital cost, and wealth transfer channels. Furthermore, a government reinsurance program is a complement to an ex-post catastrophe-relief program and a risk-based solvency regulation.

Keywords: catastrophe insurance, optimal reinsurance design, government intervention, dynamic game, public-private partnerships

JEL Classification: G22, G28, H84

Suggested Citation

Jia, Ruo and Lin, Jieyu and Wang, Hanyang (Hans), Catastrophe Risk-Sharing Decisions of Individuals, Insurer, and Government (April 26, 2020). Available at SSRN: https://ssrn.com/abstract=3270669 or http://dx.doi.org/10.2139/ssrn.3270669

Ruo Jia

Department of Risk Management and Insurance, School of Economics, Peking University ( email )

Yiheyuan Rd. 5
Haidian
Beijing, 100871
China

Jieyu Lin

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Hanyang (Hans) Wang (Contact Author)

Peking University - School of Economics ( email )

Beijing
China

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