Climate Policy

Climate Policy 6 (2006) 648–657

Research Article

The role of the private market in catastrophe insurance

Andrew Dlugolecki and Erik Hoekstra

Globally, around 80% of disaster-related losses are uninsured. There are many reasons for this market failure: from the insurers’ point of view these include high risk or small scale, absence of reliable risk data, and volatility in the event costs; from the at-risk population these include high prices, a misperception of the true risk, an expectation of government aid after disasters, and exclusion from financial services. We propose that a public–private partnership can resolve this. The public sector sets a framework to reduce the physical risks, provides cover for high-risk segments and regulates the market for other risks; the private sector provides consultancy and administrative services for all sectors and offers coverage for lower-risk segments. Competition reduces administrative costs and fraud. Cost-based pricing is an effective risk-management tool, and international (re)insurers can transfer knowledge and spread risks globally. A regional or global risk pool can reduce premium rates substantially by lowering the volatility of losses. Nevertheless the fundamental building block for catastrophe insurance is at the national level, since risks must be consistently estimated and administered locally.

Keywords: Public–private partnership; Catastrophe insurance; Market failure; Market mechanisms; Risk financing

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