Prevention and insurance of natural disasters

Abstract : World economic losses due to natural disasters have increased faster than GDP in the last three decades because risky regions have sustained growing population and low prevention measures. Moreover, only a third of these losses are insured and the low penetration of insurance generates undesirable wealth fluctuation for affected population. In this context and in the perspective of climate change, reducing natural disaster losses and increasing insurance coverage have become main challenges for our societies, which are addressed in the present thesis. Low current levels of prevention measures and insurance coverage can be explained by the numerous market imperfections and poorly designed public policies, as detailed in the introductive chapter of the dissertation. It is thus crucial to better understand these market failures and the role of public policies to improve both of them. Chapter 2 investigates preventive behaviors in the context of city development. By featuring an urban model, it shows that riskier areas are developed nearer to the city center than further away, investment in building resilience leads to more concentrated cities and riskier areas get lower household density and higher building resilience. Moreover, insurance subsidy leads to risk over-exposure through increase of density in the riskiest areas and general decrease of resilience. This analysis highlights the negative effects of subsidization and the role that can be played by urban policies such as density restrictions and building codes. The following chapters deal with risk sharing in the context of risk correlation, a main feature of natural disaster risks. In a model of a risky economy with potential risk dependence between individuals, chapter 3 shows that Pareto optimal allocation of risks can be reached thanks to stock insurance companies in competition and a reduced number of financial assets. This result, which is valid without market imperfections, requires in particular that agents be fully liable for their contracts in each state of nature. In practice, to limit the default on liabilities in catastrophic states, public policies require agents to secure financial reserves. Chapters 4 and 5 investigate the issue of risk correlation when securing financial reserves is costly. Chapter 4 analyzes how the probability of a risk affects the purchase of insurance by risk-exposed individuals. It demonstrates that individuals are more inclined to insure for low-probability risks than for high-probability risks with standard insurance costs, but result is reversed when reserve related costs are added. Chapter 5 examines the optimal design of insurance contracts when individual risks are correlated in a community. It shows that the optimal contract consists in partial insurance against individual risk, with a lower indemnity in catastrophic states than in normal states, and potentially some dividend in normal states. The last chapter concludes by opening on further possible research related to prevention and insurance of natural disasters.
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Arnaud Goussebaile. Prevention and insurance of natural disasters. Economics and Finance. Université Paris-Saclay, 2016. English. ⟨NNT : 2016SACLX014⟩. ⟨tel-01476867⟩

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