A risk-sharing mechanism for multi-region catastrophe insurance with government subsidies

Abstract

Catastrophe insurance can play an important role in compensating disaster losses and mitigating catastrophe risk, but interest in participating is usually mismatched between insurance companies and disaster-affected regions. High-risk regions are more willing to purchase catastrophe insurance, while insurance companies are reluctant to provide it. In low-risk regions, the situation is reversed. We address this problem by developing a multi-region catastrophe insurance method that disperses risk among high- and low-risk regions, expanding coverage across a broader area and ensuring profitability with greater stability for the insurance company. In this study, we introduce a risk-sharing mechanism that determines participating regions' contributions to the total premium by accounting for their disaster risk profiles and their economic status. Government subsidies are introduced to account for those regions that cannot fully afford their allocated premium. The proposed insurance system's performance is analyzed in practice, using the Yunnan Province as a test case, and the results show that multi-region catastrophe insurance can benefit both disaster-affected regions and the insurance company, and that government subsidies promote the implementation of this system.