A Disaster Under-(Re)Insurance Puzzle: Home Bias in Disaster Risk-Bearing

46 Pages Posted: 9 Sep 2019

See all articles by Hiro Ito

Hiro Ito

Portland State University - Department of Economics

Robert N. McCauley

Bank for International Settlements (BIS)

Date Written: August 30, 2019

Abstract

The losses from the 2011 earthquakes in Japan remained in Japan, while reinsurance spread the losses from that year's New Zealand earthquake to the rest of the world.This paper finds that the Japanese case is more typical: losses from natural disasters are shared internationally to a generally very limited extent. This finding of home bias in disaster risk-bearing poses a puzzle of international risk-sharing. We decompose international risk-sharing into the portion of losses insured and the portion ofinsurance that is internationally re-insured. We find that the failure of international risk-sharing begins at home with low participation in insurance. Regression analysis points to economic development and institutional/legal quality as important determinants of insurance participation. We propose a new method to measure international reinsurance payments with balance of payments data. This method identifies for the first time the cross-border flow of reinsurance payments to 88 economies that experienced insured disasters in the 1985-2017 period. Regression analysis of these data points to small size and de facto financial integration as positively related to the reinsurance share, as one might expect. However, we also find that more internationally wealthy economies reinsure less, suggesting that net foreign assets substitute for international sharing of disaster risk. For advanced economies, a lack of international risk-sharing is correlated with a lack of fiscal space. Thus, the governments under more pressure to provide ex post government insurance through the budget have less room to manoeuvre to do so. At high levels of public debt, a lack of ex ante insurance can turn disaster risk into financial risk.

Keywords: international risk-sharing, earthquake insurance, reinsurance

JEL Classification: F32, G15, G22, Q54

Suggested Citation

Ito, Hiro and McCauley, Robert N., A Disaster Under-(Re)Insurance Puzzle: Home Bias in Disaster Risk-Bearing (August 30, 2019). BIS Working Paper No. 808. Available at SSRN: https://ssrn.com/abstract=3448741

Hiro Ito (Contact Author)

Portland State University - Department of Economics ( email )

Portland, OR 97207-0751
United States
503-725-3930 (Phone)
503-725-3945 (Fax)

HOME PAGE: www.econ.pdx.edu

Robert N. McCauley

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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