Disaster Insurance Research Articles

Strengthening Resilience and Sustainability for Post-Disaster Recovery: A Comparative Law and Economics Analysis on Smart Mixes Between Mechanisms

This article advocates smart mixes of mechanisms of post-disaster recovery in terms of boosting resilience and sustainability through liability rules, government intervention, insurance, and their combinations. Liability rules can provide compensation to victims and, in theory, also reduce disaster risks, while they have their limits in practice. The government widely intervenes in disaster compensation in many countries, but it faces challenges in how it can intervene fairly and efficiently, whether through informal channels, such as ad hoc charity, or structured approaches, such as compensation funds. As governments may struggle to provide efficient and effective compensation ex post, insurance may offer proactive solutions with models of first-party catastrophe insurance and third-party liability insurance ex ante. Where market failure, liability failure, and government failure may all arise, a smart mix of mechanisms is often preferable from a law and economic perspective, rather than relying solely on one framework. However, upon examining empirical evidence regarding the effectiveness of these instruments in China, the UK, France, Germany, and Turkey, it becomes apparent that a mix of mechanisms is not always applied in an effective manner. Models of mandatory comprehensive disaster insurance, and Public–Private Partnership (PPP), which both receive government intervention as a last resort to the market and liability failures, can reach the goal of more effective compensation for disaster victims, risk prevention and resilience when faced with disaster recovery, and should therefore be substantially implemented beyond the current levels. To be clear, the proposed mix of solutions mainly focuses on legal and economic dimensions which are rather limited, ignoring, for example, building codes for structures and physical interventions.

Strategic interactions and market equilibrium in China's agricultural catastrophic insurance

Strategic interactions and market equilibrium in China's agricultural catastrophic insurance

The Impact of the WTO Agricultural Agreement on Developing Countries

Abstract: Agricultural insurance, as an agricultural risk management tool to disperse agricultural risks, compensate farmers' losses and safeguard agricultural production, has become an indispensable part of the agricultural security system in various countries. However, due to the high cost of agricultural insurance, many countries provide financial subsidies for agricultural insurance. This paper introduces the help of agricultural insurance subsidies to countries in World Trade Organization (WTO), summarizes the main features and inadequacies of relevant WTO rules, and analyzes the existing problems of agricultural insurance subsidies from four aspects based on the practice of American agricultural insurance subsidies. The main conclusions of this paper include: first, the rules of agricultural insurance subsidy are limited and the classification is not clear, which seriously harms the agricultural development of developing countries; second, income insurance and natural disaster insurance in premium subsidies are regarded as "green box" tools, which need to meet certain conditions, otherwise there is still the possibility of being regarded as "amber box" tools; third, the current WTO rules on agricultural insurance subsidies are more conducive to the development of developed countries, but the agricultural insurance subsidies in developing countries lag behind and are difficult to implement, and the rules on agricultural insurance subsidies urgently need to be improved. Fourth, the double standards of developed countries and developing countries have caused differences in the classification of agricultural insurance subsidies. Finally, the thesis puts forward some suggestions on the compliance development of China's agricultural insurance subsidies under the framework of WTO rules.

Catastrophe insurance and solvency regulation

Catastrophe insurance and solvency regulation

Exploration of Property Insurance Benefits in Extreme Weather

In recent years, the increasing frequency of extreme weather events has highlighted the insurance industry's dilemma - the profitability of insurance companies and the capacity of policyholders to bear the burden are in crisis. Therefore, seeking the development of property insurance in this environment is crucial. This paper establishes a Risk Assessment Model with a four-level index system, including four main indicators: natural, economic, social, and engineering defense, to assess the disaster risk and losses of a specific area. Subsequently, a Rate-Adjusted Break-Even Analysis Model is established and coupled with the Risk Assessment Model to facilitate practical insurance decision-making. By establishing this highly flexible and practical assessment system, precise indicators can be selected for evaluation based on the varying impacts of natural disasters in different regions. This will enable more accurate decision-making for local catastrophic insurance coverage. Consequently, it allows local residents to obtain better post-disaster relief protection against natural calamities, while businesses can also benefit from substantial reconstruction returns.

Community-Based Disaster Insurance for Sustainable Economic Loss Risk Mitigation: A Systematic Literature Review

This systematic literature review (SLR) explores the role of community-based catastrophe insurance (CBCI) as a tool for sustainable economic loss risk mitigation. Utilizing bibliometric analysis and a literature review, this study aims to reveal the methods employed in CBCI schemes from a novel perspective, highlighting their effectiveness in mitigating catastrophe risks. The PRISMA (Preferred Reporting Items for Systematic Reviews and Meta-Analyses) methodology was employed to systematically collect and analyze articles sourced from the Scopus, ScienceDirect, and Dimensions databases. The findings provide a comprehensive summary of the CBCI implementation, including various considerations such as risk-sharing mechanisms, premium determination, and policy frameworks. This research offers a fresh perspective on CBCI as a sustainable approach to catastrophe risk mitigation, contributing valuable insights to policymakers, practitioners, and researchers interested in community resilience and disaster risk management.

Climate defaults and financial adaptation

We analyze the relationship between climate-related disasters and sovereign debt crises using a model with capital accumulation, sovereign default, and disaster risk. We find that disaster risk and default risk together lead to slow post-disaster recovery and heightened borrowing costs. Calibrating the model to Mexico, we find that the increase in cyclone risk due to climate change leads to a welfare loss equivalent to a permanent 0.95% consumption drop. However, financial adaptation via catastrophe bonds and disaster insurance can reduce these losses by about 21%. Our study highlights the importance of financial frictions in analyzing climate change impacts.

Catastrophe insurance decision making when the science is uncertain

Catastrophe insurance decision making when the science is uncertain

Pure risk, agency conflict, and hedging

This study develops a theoretical model to analyze the asset substitution problem over insurance decisions. We find that agency conflict is related to a firm’s risk level and capital structure. In particular, at the optimal leverage, agency conflict occurs only when the risk level is relatively high, which explains why insurance covenants are typically for significant pure risks. Moreover, when the risk level is specified, agency conflict over insurance decisions occurs within a specific leverage range. This is consistent with the findings of some research on the asset substitution problem over speculative risk choices. In addition, we consider premium loadings and conclude that full hedging is not a firm’s optimal risk management strategy, contributing to the literature on optimal hedging decisions with transaction frictions. Our framework with premium loadings can also explain many insurance phenomena, such as risk retention for small losses and subsidies for catastrophe insurance.

Multistakeholder Partnerships and Climate Adaptation: Insights From Switzerland’s Disaster Insurance

Multistakeholder Partnerships and Climate Adaptation: Insights From Switzerland’s Disaster Insurance

Development of the Black–Scholes Model for Determining Insurance Premiums to Mitigate the Risk of Disaster Losses Using the Principles of Mutual Cooperation and Regional Economic Growth

The frequency and economic damage of natural disasters have increased globally over the last two decades due to climate change. This increase has an impact on the disaster insurance field, particularly in the calculation of premiums. Many regions have a shortcoming in employing insurance because the premium is too high compared with their budget allocation. As one of the solutions, the premium calculation can be developed by applying the cross-subsidies mechanism based on economic growth. Therefore, this research aims to develop premium models of natural disaster insurance that uniquely involve two new variables of an insured region: cross-subsidies and the economic growth rate. Another novelty is the development of the Black–Scholes model, considering the two new variables, and it is used to formulate the premium model. Following the modeling process, this study uses the model to estimate the premiums for natural disaster insurance in each province of Indonesia. The estimation results show that all new variables involved in the model novelties significantly affect the premiums. This research can be used by insurance companies to determine the premium of natural disaster insurance, which involves cross-subsidies and economic growth.

Making The Best Investment Strategy for Insurance Companies Under The Background of Extreme Weather

In the face of the negative impacts of the frequent occurrence of extreme weather disasters around the world, we have developed natural disaster risk prediction and analysis models for insurance companies to maximize their benefits. This paper first selects six risk indicators, such as flood, cold wave, drought and other disasters, and combines the analytic hierarchy process (AHP) and grey prediction model (GM) to calculate the impact weights of six kinds of natural disasters, and predicts the probability of future occurrence, so as to realize the comprehensive assessment of natural disaster risk. This paper also analyzes the effect of the owner's intention to buy insurance on the insurance strategy through the function model, and solves the optimal insurance strategy through the technique for order preferenceby similarity to ideal solution (TOPSIS) and neural network. We define the ratio of the total profit of natural disaster insurance to the total cost as the decision coefficient K. When K is greater than 35%, the insurance company chooses to write the policy, and when K is greater than 5% and less than 35%, the insurance company chooses to bear the risk. Finally, this paper collected the data of Florida and Kyushu, Japan. Through the insurance model, it calculated that the total profit of natural disaster insurance in Florida was 635.8 million US dollars, while that in Kyushu was -61.51 million US dollars. Therefore, insurance companies should invest in Florida.

Earthquake disaster insurance literacy and earthquake insurance purchasing behavior: based on the mediating effect of risk preference

Earthquake disaster insurance literacy and earthquake insurance purchasing behavior: based on the mediating effect of risk preference

Improving household and community disaster recovery: Evidence on the role of insurance

AbstractWe study the role of insurance in improving household and community disaster recovery. Our analysis harnesses both a unique survey of residents impacted by four land‐falling hurricanes in the United States and foot traffic data on visits to local businesses. Households sort into two groups when it comes to financing recovery: those primarily using property insurance and those largely uninsured, instead relying more on friends and family. Insurance improves households' ability to participate in the local economy. Postflood visitation rates to many local businesses increase with greater flood insurance take‐up rates. Expanded participation in the local economy is consistent with insurance reducing financial constraints; indeed, insured households are less likely to report experiencing high financial burdens in both the short and longer‐run postdisaster and are less likely to have unmet funding needs. Despite this, motivating the purchase of disaster insurance remains challenging, particularly among low‐income households who perceive insurance as less useful.

Enhancing Disaster Resilience: Insights from the Cianjur Earthquake to Improve Indonesia’s Risk Financing Strategies

Earthquakes pose a growing threat to Indonesia, and the country’s limited resources for risk mitigation propagate its vulnerability. The heavy reliance on ad-hoc government relief for risk transfer is not sustainable. This study aims to provide scientific evidence for formulating disaster risk financing strategies in Indonesia, focusing on active fault areas with high population density. By analyzing people’s responses to risk financing after the November 21, 2022, earthquake in Cianjur Regency, the study examines emotional reactions, risk perceptions, and willingness to participate in risk insurance. The findings highlight three major issues: low participation in insurance programs due to limited insurance literacy and enrollment, the significant financial burden on the government from material losses, and the critical need for disaster insurance schemes for homes and fixed assets. The study emphasizes the urgency of implementing disaster risk financing in Indonesia, with a focus on the vulnerability of poor and low-income households. It also stresses the importance of enhancing disaster risk governance and promoting public-private partnerships on small-scale insurance schemes.

A Mutual Catastrophe Insurance Framework for Horizontal Collaboration in Prepositioning Strategic Reserves

Improving Disaster Preparedness Through Mutual Catastrophe Insurance In “A Mutual Catastrophe Insurance Framework for Horizontal Collaboration in Prepositioning Strategic Reserves,” H. Zbib, B. Balcik, M.-È. Rancourt, and G. Laporte present an innovative approach to collaborative disaster preparedness. The novel framework considers a risk-averse mutual insurer offering multiyear insurance contracts with coverage deductibles and limits to a portfolio of risk-averse policyholders. It is designed to foster horizontal collaboration among policyholders for joint disaster preparedness by effectively integrating operational and financial functions. The problem is modeled as a large-scale nonlinear multistage stochastic program and solved by using an effective Benders decomposition algorithm. The framework is validated with real data from 18 Caribbean countries focusing on hurricane preparedness. Given the predicted impacts of climate change, the proposed multiyear mutual catastrophe insurance framework promises to reshape global disaster preparedness and make a profound societal impact by providing a transparent disaster financing plan to protect vulnerable regions. The study’s findings stress the importance of long-term cooperation, prenegotiation of indemnification policies, and strategic setting of deductibles and limits by taking into account the correlation between policyholders.

THE IMPACT OF CLIMATE CHANGE ON THE RISK-TAKING LEVEL OF CHINESE COMMERCIAL BANKS: EMPIRICAL EVIDENCE FROM CHINESE LOCAL COMMERCIAL BANKS

China’s risk disasters caused by climate change have increased the risk-taking level of China’s commercial banks, posing a threat to the stable development of financial markets. Based on the data from 152 commercial banks in China from 2011 to 2021, this paper uses the fixed effect model to analyze the effect and mechanism of China’s climate change on the risk-taking level of Chinese commercial banks. The main conclusions are as follows. (1) Climate change has significantly improved the risk-taking level of Chinese commercial banks. The results remain significant under the robustness and endogenous tests, such as dealing with endogenous problems, changing variables and adjusting sample intervals. (2) The results of heterogeneity analysis show that under different regions and different types of conditions, the impact of climate change on the risk-taking level of China’s commercial banks is heterogeneous, and the impact is stronger in urban commercial banks and eastern China. (3) The direct economic losses caused by natural disasters caused by climate change affect the risk-taking level of Chinese commercial banks; however, the adjustment of ex ante disaster insurance can weaken the impact of climate change on the risk-taking level of Chinese commercial banks. This paper studies the impact of climate change on the risk-taking level of Chinese commercial banks from the perspective of bank risk-taking level, which is of great significance to enhance the risk prevention awareness of Chinese commercial banks in response to climate change.

Determination of Mount Eruption Insurance Premiums in Indonesia Based on Collective Risk and Level of Risk Spread

Volcano eruption insurance is an insurance product that provides financial protection to policy holders who experience losses due to volcanic eruptions. This insurance product is still rarely developed in Indonesia, even though this country is very vulnerable to natural disasters. Therefore, this research aims to carry out a simulation of determining volcanic eruption disaster insurance premiums based on collective risk and the level of risk distribution. The data used in this research is the frequency of events and economic losses due to volcanic eruptions. Event frequency and loss data are analyzed using a collective risk model. Apart from that, determining insurance premiums also takes into account loading factors and the level of risk distribution from volcanic eruption disaster data. From the results of the analysis, it was found that natural disaster insurance premiums had increased, along with an increase in the loading factor provided. In addition, insurance premium expenses are influenced by the collective risks faced by customers. The greater the collective risk faced, the greater the insurance premium that customers must bear. Based on the results of the estimates carried out, it is hoped that this research can provide an overview to the Indonesian government in estimating the Mount Meletus insurance scheme. Meanwhile, insurance companies can get an idea of determining insurance premiums according to conditions in the field.

Climate Change-Related Disaster Risk Mitigation through Innovative Insurance Mechanism: A System Dynamics Model Application for a Case Study in Latvia

This study explores how the System Dynamics modeling approach can help deal with the problem of conventional insurance mechanisms by studying the feedback loops governing complex systems connected to the disaster insurance mechanism. Instead of addressing the disaster’s underlying risk, the traditional disaster insurance strategy largely focuses on providing financial security for asset recovery after a disaster. This constraint becomes especially concerning as the threat of climate-related disasters grows since it may result in rising long-term damage expenditures. A new insurance mechanism is suggested as a solution to this problem to lower damage costs while safeguarding insured assets and luring new assets to be protected. A local case study utilizing a System Dynamics stock and flow model is created and validated by examining the model’s structure, sensitivity analysis, and extreme value test. The results of the case study performed on a city in Latvia highlight the significance of effective disaster risk reduction strategies applied within the innovative insurance mechanism in lowering overall disaster costs. The logical coherence seen throughout the analysis of simulated scenario results strengthens the established model’s plausibility. The case study’s findings support the innovative insurance mechanism’s dynamic hypothesis and show the main influencing factors on the dynamics within the proposed innovative insurance mechanism. The information this study can help insurance firms, policy planners, and disaster risk managers make decisions that will benefit local communities and other stakeholders regarding climate-related disaster risk mitigation.

DÜNYA’DA VE TÜRKİYE’DE AFET EKONOMİSİ VE AFET SİGORTACILIĞI ÜZERİNE BİR DEĞERLENDİRME

Dünya genelinde yaşanan iklim değişikliğinin küresel etkileri, son yıllarda daha belirgin bir şekilde görülmektedir. Doğal afet sayılarının artması ülkelerin ekonomik kayıplarının artmasıyla doğru orantılı olmaktadır. Afetlerin önlenmesi ve afetlere hazırlık aşamasında can ve mal kayıpları etkilerinin azaltılmasında afet yönetimi oldukça önemlidir. Bu çalışmada, Türkiye’de ve Dünya’da afet ekonomisi ve afet sigortacılığının durumuna bakılarak afet yönetiminin öneminin vurgulanması amaçlanmıştır. Bu amaçla, Afet Epidemiyolojisi Araştırma Merkezi (CRED), Acil Durum Olayları Veri Tabanı (EM-DAT), Doğal Afet Sigortaları Kurumu (DASK) ile Afet ve Acil Durum Yönetimi Başkanlığı (AFAD)’nın raporları incelenmiştir. Çalışmanın sonucunda, Türkiye’de ve Dünya’da afet yönetiminin can ve mal kayıpları etkilerini azalttığı ve afet sigortacılığını geliştirdiği düşünülmüştür. Ayrıca, Türkiye’de en çok yaşanan deprem ve sel gibi doğal afetlerin ekonomik etkilerini azalmak için afet sigortacılığının en az afet yönetimi kadar etkili olduğu tahmin edilmiştir.