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084022 (M54) Catastrophic responses to catastrophic risks
Abstracts and Reviews This article explains how lobbying pressure intensifies tax-transfer inefficiencies in disaster prevention and relief. The social-welfare tradeoff in the government's joint provision of safety regulation and disaster relief is distorted by disinformational lobbying activity by disaster-exposed households and by conflict between principles of horizontal and vertical equity. Horizontal equity presupposes that no group of taxpayers wants to transfer wealth ex ante to equally wealthy disaster-exposed parties. But vertical equity implies that, when disaster strikes, households that were previously able to hide the mitigability of their exposure to a ratable hazard can nevertheless extract sizable transfers from other taxpayers ex post. Keywords: Catastrophic insurance, Disaster prevention, Disaster relief, Lobbying pressure, Tax equity, Asymmetric information.
084020 (M54) A Rational Approach to Pricing of Catastrophe Insurance Weimin Dong, Shah, H.C. and Wong F., Journal of Risk and Uncertainty, 1996, Volume 12, hr. 2/3, pp. 201-218. A methodology for rational pricing of catastrophe insurance is described. The methodology has two components: a solvency- and stability-based pricing framework, and an engine to quantify the loss variability that drives solvency and stability. Generalization to account for contagious effects of catastrophes and multiple occurrence of peril is presented in detail. Keywords: Insurance, Pricing, Catastrophe, Multiple perils, Capacity, Risk load. 084021 (M54) The Government, the Market, and the Problem of Catastrophic Loss Priest G.L., Journal of Risk and Uncertainty, 1996, Volume 12, hr. 2/3, pp. 219-237. This article addresses the comparative advantage of the government to the private property/casualty insurance industry for the provision of insurance coverage for catastrophic losses. That the government can play an important role as an insurer of societal losses has been a central public policy principle since at least the New Deal. In addition, our government typically automatically provides forms of specific relief following unusually severe or unexpected disasters, which itself can be viewed as a form of ex post insurance. This article argues that, for systemic reasons,
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the government is much less effective than the private property/casualty insurance market in providing coverage of losses generally, but especially of losses in contexts of catastrophes. Keywords: Government insurance, Catastrophe, Disaster.
084022 (M54) Catastrophic Responses to Catastrophic Risks Epstein, R.A., Journal of Risk and Uncertainty, 1996, Volume 12, hr. 2/3, pp. 287-308. Socializing risks from catastrophic losses is difficult even in an ideal political environment, owing to different estimates of low probability risks, solvency constraints, dangers of moral hazard, and high loss correlation. However, these intrinsic contracting problems do not justify invalidating ordinary insurance contracts or forcing insurers to cover catastrophic losses. Yet, political pressures forcing insurance subsidies now induce inefficient decisions in siting and construction, with high expected social losses. Ordinary contract solutions are always imperfect, but superior to the regulatory maze. Unfortunately, patterns of legislation and court decisions are running in the wrong direction. Keywords: Catastrophic risk, Contra proferentum, Coverage formulas (exposure, manifestation, tripletrigger), Pollution exemption, Socialized losses.
El0: INSURANCE RELATED MATHEMATICAL ECONOMICS, GENERAL AND MISCELLANEOUS 084023 (El0) Fairly priced deposit insurance, incentive compatible regulations, and bank asset choices Suk Heun Yoon, Mazumdar, The Geneva papers on risk and Insurance Theory, 21 13-141 (1996) The paper provides incentive compatible regulations that support fairly priced deposit insurance in a competitive banking industry. If informational asymmetry exists between the regulator and banks regarding loan quality, but the regulator can observe actual loan rates charged, then imposing a capital requirement schedule that leads market loan rates to decrease in loan quality is shown to be incentive compatible. Competition in the loan market induces banks to be indifferent to all loans that satisfy a minimum acceptable quality and reject all riskier loans. The regulator could reduce the banking industry's
084020 (M54) A Rational Approach to Pricing of Catastrophe Insurance Weimin Dong, Shah, H.C. and Wong F., Journal of Risk and Uncertainty, 1996, Volume 12, hr. 2/3, pp. 201-218. A methodology for rational pricing of catastrophe insurance is described. The methodology has two components: a solvency- and stability-based pricing framework, and an engine to quantify the loss variability that drives solvency and stability. Generalization to account for contagious effects of catastrophes and multiple occurrence of peril is presented in detail. Keywords: Insurance, Pricing, Catastrophe, Multiple perils, Capacity, Risk load. 084021 (M54) The Government, the Market, and the Problem of Catastrophic Loss Priest G.L., Journal of Risk and Uncertainty, 1996, Volume 12, hr. 2/3, pp. 219-237. This article addresses the comparative advantage of the government to the private property/casualty insurance industry for the provision of insurance coverage for catastrophic losses. That the government can play an important role as an insurer of societal losses has been a central public policy principle since at least the New Deal. In addition, our government typically automatically provides forms of specific relief following unusually severe or unexpected disasters, which itself can be viewed as a form of ex post insurance. This article argues that, for systemic reasons,
263
the government is much less effective than the private property/casualty insurance market in providing coverage of losses generally, but especially of losses in contexts of catastrophes. Keywords: Government insurance, Catastrophe, Disaster.
084022 (M54) Catastrophic Responses to Catastrophic Risks Epstein, R.A., Journal of Risk and Uncertainty, 1996, Volume 12, hr. 2/3, pp. 287-308. Socializing risks from catastrophic losses is difficult even in an ideal political environment, owing to different estimates of low probability risks, solvency constraints, dangers of moral hazard, and high loss correlation. However, these intrinsic contracting problems do not justify invalidating ordinary insurance contracts or forcing insurers to cover catastrophic losses. Yet, political pressures forcing insurance subsidies now induce inefficient decisions in siting and construction, with high expected social losses. Ordinary contract solutions are always imperfect, but superior to the regulatory maze. Unfortunately, patterns of legislation and court decisions are running in the wrong direction. Keywords: Catastrophic risk, Contra proferentum, Coverage formulas (exposure, manifestation, tripletrigger), Pollution exemption, Socialized losses.
El0: INSURANCE RELATED MATHEMATICAL ECONOMICS, GENERAL AND MISCELLANEOUS 084023 (El0) Fairly priced deposit insurance, incentive compatible regulations, and bank asset choices Suk Heun Yoon, Mazumdar, The Geneva papers on risk and Insurance Theory, 21 13-141 (1996) The paper provides incentive compatible regulations that support fairly priced deposit insurance in a competitive banking industry. If informational asymmetry exists between the regulator and banks regarding loan quality, but the regulator can observe actual loan rates charged, then imposing a capital requirement schedule that leads market loan rates to decrease in loan quality is shown to be incentive compatible. Competition in the loan market induces banks to be indifferent to all loans that satisfy a minimum acceptable quality and reject all riskier loans. The regulator could reduce the banking industry's