Disaster Risk Financing through Taxation: A Framework for Regional Participation in Collective Risk-Sharing
By: Fallou Niakh , Arthur Charpentier , Caroline Hillairet and more
Potential Business Impact:
Helps countries share disaster costs fairly.
Plain English Summary
When disaster strikes, communities can now recover faster without facing financial ruin. This approach uses a mix of private insurance and government-backed support to spread the costs of major catastrophes across everyone fairly. It means that even if an insurance company can't cover all the damages, people still get the help they need through a shared safety net. This protects families and local economies from being wiped out by unexpected events like floods or earthquakes.
We consider an economy composed of different risk profile regions wishing to be hedged against a disaster risk using multi-region catastrophe insurance. Such catastrophic events inherently have a systemic component; we consider situations where the insurer faces a non-zero probability of insolvency. To protect the regions against the risk of the insurer's default, we introduce a public-private partnership between the government and the insurer. When a disaster generates losses exceeding the total capital of the insurer, the central government intervenes by implementing a taxation system to share the residual claims. In this study, we propose a theoretical framework for regional participation in collective risk-sharing through tax revenues by accounting for their disaster risk profiles and their economic status.
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