Insurance for Catastrophes - Indemnity vs. Parametric Insurance with Imperfect Information

Arbeitspapier

Insurance for natural hazards - earthquakes, hurricanes, or pandemics - is rarely comprehensively adopted without intense government intervention, and even then it is often only a minority of properties or businesses that are insured. Efforts to close this insurance gap include the introduction of parametric (index) insurance products for various catastrophic risks. We compare parametric to indemnity insurance in a simple model where the insurance company has superior information about the probability of the event (reversed asymmetric information). We find that indemnity insurance tends to be welfare superior, because the coverage provided to agents who underestimate the event probability is larger than with parametric cover. Since it could plausibly be argued that a majority of the population is underestimating the risks of many types of extreme events, this difference in social welfare is potentially substantial.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9631

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Asymmetric and Private Information; Mechanism Design ; Insurance; Insurance Companies; Actuarial Studies
• Subject: business interruption insurance ; insurance for pandemics ; parametric vs. indemnity insurance ; reversed asymmetric information

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Feess, Eberhard ; Jordan, Cathrin ; Noy, Ilan
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/252148
• Last update: 10.03.2025, 11:43 AM CET