Risk of Natural Disasters and Its Influence on Property Insurance
Date Issued
2015
Date
2015
Author(s)
Liu, Pin-Chia
Abstract
In recent years, the impacts of global climate change and natural disasters have been noticed and discussed extensively. In this study, whether climate change and natural disasters have an impact on the insurability and would cause market failure of property insurance are investigated with a view to providing suggestions to benefit the insurance industry. Collect data and information related to the construction of regression models, then analyze these data and to investigate the results through time series analysis. After the analyses, upward trends along with time are found for both the frequency and damage of natural disasters, resulting in increases in both the overall and insured losses. It is also found that the loss distribution of natural disasters is fat-tailed. The result indicates the probability of natural disasters declines slowly relative to the severity of property loss, and the losses of different natural disasters are correlated with one another. It implies that there is lack of risk diversification in the insurance industry. The above features of risk caused by natural disasters reflect problems of adverse selection and moral hazard, which would result in a high risk of insolvency for an insurer. Therefore, property insurance companies should carefully recognize and study the impact of natural disasters on the insurability and market failure problems of property insurance. Although the national natural disaster insurance schemes have been implemented in a few countries, they still face the above problems. Several means are proposed to solve the problems. They include (1) designing a program of premium discrimination to reduce adverse selection, (2) imposing an actuarial deductible to increase loss prevention incentive and decrease moral hazard, and (3) using the reinsurance mechanism to transfer the excess risk.
Subjects
Natural disaster
Risk
Property insurance
Insurability
Moral hazard
Adverse selection
SDGs
Type
thesis
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