comparison of alternative national risk tranfer systems .comparison of alternative national risk
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COMPARISON OF ALTERNATIVENATIONAL RISK TRANFER SYSTEMS:
A fundamental view
JOANNEUM RESEARCH Graz Institute of Technology and Regional Policy (InTeReg)
Joint Seminar of the University of Innsbruck and alpSFinancial Risks of Natural Hazards: Markets and the Role of the State
INNSBRUCK, July 5-6, 2007
Franz Prettenthaler & Nadja Vetters
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Designing national risk transfer mechanisms is a matter of dynamic mechanism design
Mechanisms implement social choice functionsThe Fundamentals of RTMs therefore are to be found in Dynamic Social Choice theory under risk
Harsanyi (1955) shows that VNM axioms imply utilitarianism Myerson (1981) shows the problem of dynamic inconsistencies
in egalitarian social choice Mongin (1995) generalises Harsanyis results for SWFL Prettenthaler (2002) shows the coherence of Myersons and
Mongins resultsFacing natural catastrophies, egalitarianism is a popular viewAre egalitarian RTMs necessarily dynamically inconsistent and therefore inefficient?
Motivation
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Setting the fundamental scene for RTMs Mechanism Design based on Social Choice Theory VNM axioms and Social Choice Theory Dynamic Consistency & Utilitarianism vs. Egalitarianism
Numeric Example To expose the problem To set up the comparative framework
Some national RTMs
A fundamental comparison
Overview
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Theory behind: a numerical example (1)
Two individuals A, B
3 periods
Period 1 & 3: society decides
Period 2: nature decides
The result after period 3 is evaluated from an ethical perspective
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nF x (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
Period 1 Period 2 Period 3Potential flood
disaster
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2 Social Welfare Functions
Utilitarian: Wu(UA,UB) = UA+UBEgalitarian: We(UA,UB) = min {UA,UB}
Evaluation of results
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nF x (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
contingent policy plans: e.g. (x; y,y)
Period 1 Period 2 Period 3
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Evaluation of the EXPECTED result (1)
E.g. ex ante approach
Utilitarian: Wu(EUA,EUB)
Egalitarian:We(EUA,EUB)
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511(6,5)(y;y',y')310(3,7)(y;y',x')29(7,2)(y;x',y')48(4,4)(y;x','x')612(6,6)(x;y',y')29(2,7)(x;y',x')311(8,3)(x;x',y')48(4,4)(x;x',x')
We(EUA,EUB)Wu(EUA,EUB)(EUA,EUB)Policy Plan
Max :
Therefore choose :
Evaluation of the EXPECTED result (2)
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nF x (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
We(4,4) = 4
We(4,4) = 4
We(12,2) = 2
We(0,10)= 0
Period 1 Period 2 Period 3
While:
But:
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nF x (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
Wu(4,4) = 8
Wu(4,4) = 8
Wu(12,2) = 14
Wu(0,10)= 10
Period 1 Period 2 Period 3
Whereas:
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Egalitarianism seems to be in conflict with dynamic consistency
Up to now the ex ante approach was chosen
Ex post approach would mean: First, the social welfare is calculated from the final
result Secondly the expected value thereof is maximized
Oberservation
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111(y;y',y')310(y;y',x')29(y;x',y')48(y;x','x')212(x;y',y')29(x;y',x')311(x;x',y')48(x;x',x')
EVe(UA,UB)EVu(UA,UB)Policy Plan
Ex post evaluation
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Observation
Egalitarianism is not in conflict with dynamic consistency but
Ex ante ex post equivalence
Under the ex post approach, egalitarians can choose dynamically consistent
Price to pay: ex ante preferences of individuals cannot be fully respected
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Switzerland
Cantonal Property Insurance mandatory (automatic) extension of coverage to
include natural hazards Obligation to contract (monopoly position) Unlimited coverage, low premiums Reinsurance plus insurance pool (IRV, IRG) Important role in prevention and spatial planning
Private insurance market (GUSTAVO cantons) mandatory extension of coverage Premiums not risk related Elementary damage pool
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France
The CAT NAT insurance scheme Private insurance carrier but regulated mandatory extension of coverage to include
exceptional natural hazards risk independent premium surcharge (in %) Compensation demands governmental decision Unlimited government reinsurance by CCR (adverse
selection problem stimulated reform) Sliding scale for deductibles in communities without
risk prevention plans No extension of coverage for new buildings in risk
zones after the publication of risk prevention plans
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Spain
Consorcio de Compensacin de Seguros Automatic coverage of extraordinary events
(compulsory insurance) when underwriting certain insurance contracts
Monopoly position Premiums risk independent Profits and interests paid into a reserve pool Distributed via private insurance companies, claim
settlement by the Consorcio Unlimited state guarantee Not very actively involved in prevention
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USA
National Flood Insurance Program Optional coverage of flood damage in communities
participating in the Program Communities have to develop risk management plans Risk mapping via NFIP Premiums depending on flood risk and quality of the
risk, partly subsidized Distribution/claims settlement via licensed agents and
private insurance companies State guarantee (loan of up to 1,5 billion US$) Different incentives for communities and individuals
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Turkey
Turkish Catastrophe Insurance Pool Launched 2000 with assistance from the World Bank Compulsory insurance coverage for all residential
dwellings Stand alone insurance policy Risk related premiums (based on risk zone and type
of building) Management outsourced to reinsurance company Distribution through private insurance companies,
independent loss adjustors tax-exempt Actively involved in prevention and awareness raising
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Austria
private insurance market + public compensation fund
private insurance market: low insurance penetration very limited coverage extended coverage only outside flood risk areas Premiums are risk independent
catastrophe fund: tax financed compensation and prevention compensation is limited