Abstract
The frequency and intensity of catastrophes (including natural disasters and pandemics) rise and damage the population's health, life and property more seriously. In order to protect population health and wealth via full insurance indemnity, many countries set up a public catastrophe insurance scheme (PCIS) to maintain the function of catastrophe insurance markets. Little literature discusses the smart payment way of contributions charged by PCIS. This article design a model to describe the upward trend and cyclic frequency and intensity of catastrophic events. Such characteristics also promote the business cycle of the insurance industry. We analyze the changes in catastrophic insurer's capital structures under three cases of that the volume-based charges to the PCIS may come from equity holders or policyholders or both. PCIS may entail a shift of equity capital toward minimum solvency requirements, and then adverse incentives regarding insurer's security level arise. Various numerical experiments illustrate the changes in equity position, default probabilities, or expected policyholder deficits. The results show that the payment way of contributions should be designed carefully, not only with regard to PCIS's finance balance but also the resultant incentives and effects.
Highlights
Financial services include banking and insurance [1,2,3]
Using the same framework and assumptions introduced early in section Numerical Experiment of the Impact on Stakeholder Positions, we focus on the values of policyholders H∗0,P under different initial premiums P0 and contributions rates α because the situation of the equity holders is not altered due to policyholders’ paying public catastrophe insurance scheme (PCIS) contribution
The worldwide increasing frequency and intensity of disasters engender an upward trend in economic losses and in insured losses and damage the catastrophe insurance market
Summary
Financial services include banking and insurance [1,2,3]. The overall economic and commercial institutions have certain potential proliferation external economic effects [4, 5]. Patrick [6] proposed two financial development hypotheses. When economic growth needs to be built on the basis of the healthy development of the entire financial system, it is called supply-led; while in the process of economic growth, the entire financial system is continuously stimulated and developed, which is called the demand-following hypothesis. Nishat and Saghir [7] put forward the “feedback hypothesis,” that is, financial development variables and economic growth variables operate causally in two directions at the same time. A key aspect of the financial market is the financial intermediary role of the insurance industry. Ward and Zurbruegg [5] and Hussels et al [9] believe
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