Pareto-Efficient Risk Sharing in Centralized Insurance Markets with Application to Flood Risk

44 Pages Posted: 15 Sep 2022 Last revised: 27 Jan 2024

See all articles by Tim J. Boonen

Tim J. Boonen

University of Hong Kong

Wing Fung Chong

Heriot-Watt University - Department of Actuarial Mathematics and Statistics

Mario Ghossoub

University of Waterloo

Date Written: January 26, 2024

Abstract

Centralized insurance can be found in both the private and public sectors. This paper provides a micro-economic study of the risk-sharing mechanisms in these markets, where multiple policyholders interact with a centralized monopolistic insurer. With minimal assumptions on the risk preferences of the market participants, we characterize Pareto optimality in terms of the agents' risk positions and their assessment of the likelihoods associated with their loss tail events. We relate Pareto efficiency in this market to a naturally associated cooperative game. Based on our theoretical results, we then consider a model of flood insurance coverage via an illustrative example. The lessons drawn from this example lead to important policy implications for the existing National Flood Insurance Program in the United States.

Keywords: Climate change, flood risk, spatial diversification, risk sharing, Pareto optimality, layer-type indemnities

Suggested Citation

Boonen, Tim J. and Chong, Wing Fung and Ghossoub, Mario, Pareto-Efficient Risk Sharing in Centralized Insurance Markets with Application to Flood Risk (January 26, 2024). Available at SSRN: https://ssrn.com/abstract=4206423 or http://dx.doi.org/10.2139/ssrn.4206423

Tim J. Boonen

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Wing Fung Chong

Heriot-Watt University - Department of Actuarial Mathematics and Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

Mario Ghossoub (Contact Author)

University of Waterloo ( email )

Dept. of Statistics & Actuarial Science
200 University Ave. W.
Waterloo, Ontario N2L 3G1
Canada

HOME PAGE: http://uwaterloo.ca/scholar/mghossou

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