The Research Of Public Intervention In Integrated Catastrophe Risk Management

Catastrophe risk has brought great losses to the world, and the traditional insurance mechanism is now facing great challenges in managing catastrophe risk. Although the private sector has tried to develop several of innovations in order to expand the insurance coverage, but they don't solve such dilemmas of private catastrophe market failure. Such failures have led to the discussion of public intervention of catastrophe risk management which is a natural choice when private market can not solve the problem by itself. The public-private cooperation is an efficient way to manage catastrophe risks. How to make the correct decisions from different options of public intervention, together with the risk sharing between the two public and the private sectors are the key successful issues of the integrated catastrophe risk management. Under such background, this thesis analyzes the results of different public interventions in catastrophe risk management, as well as the risk sharing between the public and the private sectors in the integrated catastrophe risk management, and hopes it can give some insights to the organization of the catastrophe risk management mechanism in China.This thesis firstly discusses the insurability standards of catastrophe risks, concludes the risk transfer channels in private catastrophe risk market as well as its' innovations, and the phenomena of private catastrophe insurance market failure. It then analyzes reasons leading to the private catastrophe market failure from both supply and demand sides, so as to interpret the importance of public intervention. The second section of the thesis then focuses on the results of various public interventions using economic analysis, and the optimal risk sharing between the public and private sectors. After the theoretical analysis, the thesis then compares public-private catastrophe risk management models of different countries in the practice, concludes the conditions for different forms of models. The last section then gives some advices to the integrated catastrophe risk management in China. The main contents of the thesis are as follows:1. Systematically sums up the risk transfer mechanisms of private sector catastrophe, and points out that private catastrophe market failure exits in both supply and demand sides. In the analysis of the reasons for the private catastrophe failure, the thesis discusses the ex post default in mutual principle under a dynamic framework by the repeat game model of Kocherlakota (1996) . Our results show that if the members are myopic, then the mutual firm may not be able to exit, and its probability of existence decreases with the lossest the members should pay after the catastrophe event. These results corresponds the economic reality in the catastrophe market.The work points out the limitations of the research of the global diversification of catastrophes based on the law of large numbers. It then reanalyzes the cross section diversification of catastrophes under a frame work of stable distribution and majorization theory. The results find out the limitation of cross section diversification among independent catastrophe risks and partly explain why private insurance firms do not want to offer catastrophe coverage.On the demand side, the thesis sums up the anomalies at the catastrophe demand side, and give the argument that psychological issues are key factors affecting the catastrophe insurance demand. It then shows a framework of behavioral economy, and sums up a target decisions process. It argues that such a decision making process can explain anomalies during catastrophe insurance demand to some extent.2. Thesis analyzes the influence of different public interventions on the private catastrophe insurance market. Still under the framework of repeat game model in private section, it analyzes the role of public punishment in the existence of mutual principle, and the results show that public punishment can help to solve the default risk under mutual principle without affect the optimal risk allocation in the private catastrophe market.The discussion of government subsidiary shows that there is no difference between premium subsidiary and management fees subsidiary. But when the subsidiary is a proportion of the premium, then the form of premium subsidiary takes advantage of the form of management fees.It systematically sums up the compulsory insurance under the market with adverse selection. It gives the different equilibrium under adverse selection, and shows that the combination of compulsory insurance and private addition coverage can lead to the M&S Subsidiary equilibrium. Compulsory insurance is the effective way to solve the catastrophe insurance demand and without changing the Pareto risk allocation of private insurance sectors.As for the government relief, the thesis expand the research of Kim & Schlesinger in 2005 by analyzing the effect of government relief on the market equilibrium with adverse selection considering the resources and costs of government funds, and found the basic principle of government relief which aims at helping those with low incomes.3. In the research of the organization of integrated catastrophe risk management, the thesis arguments that risk sharing between public and private sectors is the key successful factor of the whole mechanism. The thesis follows the way of Michel-Kerjan (2006) , considers the optimal risk sharing in the integrated catastrophe risk management in an expected utility framework. The results show that the optimal decision depends on funding cost of the government. When the cost increases, the government can increase the premium or decrease the upper limit of the private sectors' risk transfer to force the private sector to share more risk.After comparing various integrated catastrophe insurance pool in different countries, the thesis gives some advices to the organization of Chinese catastrophe insurance pool.The main innovations of the thesis are as follows:1. Systematic analysis of the reasons of private catastrophe market failure. Many articles have mentioned the private catastrophe market failure, but very few of them die the work of systematic and quantitative analysis of it's reasons. The third section of the thesis is the first to analyze the reasons of private catastrophe market from both supply and demand sides. On the supply side, the thesis discusses the ex post default and exit threats of the mutual principle using a repeated game model, and then analyzes the limitation of global diversification of catastrophe risks under a framework of stable distribution.2. Sums up the effect of various public interventions on the catastrophe insurance e market. Almost all the articles in China are focusing on the efficiency comparison of government relief and the ex ante financing of catastrophe risks by catastrophe risk pool, but none of them have discussed the effects and efficiency of various public interventions using quantitative methods. The fourth section of the work firstly sums up the (dis) advantages of various public interventions, and then analyzes the effects and efficiency of those interventions. Continuing the repeated game model in the third section, it discusses the effect government punishment on the market equilibrium and risk sharing in the mutual principle. It then analyzes the efficiency of different financial subsidiaries as well as the effect of government relief on the catastrophe insurance market with adverse selection.3. The analysis of optimal risk sharing between public and private sectors in the integrated catastrophe risk pool. As the key factor of integrated catastrophe risk pool is the reasonable risk sharing between government and private sectors, the fifth section of the thesis discusses above question in a model with game theory. The quantitative method is the most important improvement of this thesis in comparison with other articles in this area; the model especially focuses on the impact of information on the optimal risk allocation as well as the role of funding cost of the government.