Natural Disaster Insurance

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Natural Disaster Insurance and The Equity-Efficiency Trade-Off This article written by Pierre Picard investigates the role of private insurance in the prevention and mitigation of natural disasters. it characterizes the equity-efficiency trade-off between policy makers under imperfect information about individual prevention costs Pierre Picard , with one simple model, illustrates how tax cuts on insurance contracts can improve incentives to prevention of natural disasters. ------------------------------------------------- and highlights complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdiction. ------------------------------------------------- INTRODUCTION…show more content…
------------------------------------------------- Insurers can, also, convey incentives for prevention through price signals. This may be done by charging risk-adjusted insurance premiums for property insurance or business interruption insurance in order to discourage the development of new housing or productive investment in hazard-prone areas or to incite property developers to comply with building codes. However, using insurance pricing to mitigate natural disasters is not an easy task ! First, individuals may prefer to rely on postdisaster assistance from governments or nongovernment organizations (NGOs) rather than paying an insurance premium to protect themselves against the consequences of natural hazards. Second, property owners may underestimate their true loss probability. : they do not understand low probabilities well (they may think a "100-year return flood" will not come back before 100 year !), Third, They may be myopic and consider that insurance is a bad investment and decide to cancel their policy if no catastrophe occurs during several years, Fourth, lower income consumers have difficulty affording insurance, and of course this is important problem in developing countries. Fifth, because of adverse selection the burden may be concentrated on high-risk individuals, which makes it even heavier. EQUITY AND EFFICIENCY IN
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