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Insurance of the natural disasters
[Assurance des catastrophes naturelles : faut-il choisir entre prévention et solidarité ?]

Author

Listed:
  • Laure Latruffe

    (ESR - Unité de recherche d'Économie et Sociologie Rurales - INRA - Institut National de la Recherche Agronomique)

  • Pierre Picard

    (Département de Sciences Economiques - UdeM - Université de Montréal)

Abstract

This paper investigates the trade-off between solidarity and incentives to prevention in the insurance of natural disasters. Our starting point is the French indemnifi cation system for natural disasters governed by the Law of 13 July 1982: in order to assert the solidarity of the nation with high risk individuals, all property insureds have to pay a socalled cat-nat premium. The amount of this premium is set by the Government and it does not depend on incurred risk, which strongly reduces the effi ciency of prevention incentives. We establish a condition under which the liberalization of the market for natural disaster insurance associated with compensatory transfers would lead to a Pareto improvement, although individual prevention costs are unobservable. We characterize the trade-off between prevention and solidarity which follows from such a policy and we show that it dominates incentives through deductibles. Finally we also show that our results still hold in a setting where there is an asymmetry of information about individual risks between insureds on one side and insurers and the Government on the other side.

Suggested Citation

  • Laure Latruffe & Pierre Picard, 2002. "Insurance of the natural disasters [Assurance des catastrophes naturelles : faut-il choisir entre prévention et solidarité ?]," Post-Print hal-02758707, HAL.
    • Handle: RePEc:hal:journl:hal-02758707
    as

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