Insurable Risk Theory And Management Of Catastrophe Risk Countries

Catastrophes are infrequent events that cause severe loss, injury or property damage to a large population of exposures. Catastrophe has the characteristics of low probability, high loss, being difficult to predict and high correlation among exposures. Catastrophes have huge negative impacts on a country's employment, debts, balance-of payments and exchange rate, etc, and the negative impacts can be seen as loss in terms of GDP change. The impacts of catastrophe to different countries are not the same, because the vulnerability of the different countries are different, that is, the sizes of the economies, the economic diversifications and the management of the catastrophic risks are different.There are plenty of measures to manage the catastrophic risks on a country's level. The developing countries usually depend on the reallocation of fiscal budgets and the international aids after the happenings of the catastrophes. These are ex post catastrophic risk financing. The developed countries, on the contrary, manage the catastrophic risks actively, using insurance, reinsurance and capital market instruments to transfer and finance the catastrophic risks, that is, ex ante risk financing. Because of the difference of the management of catastrophic risks between the developing and the developed countries, the financial and economic impacts of catastrophes are larger in developing countries than in developed countries.The active management of catastrophic risks needs the establishment of an ex ante risk financing mechanism. Insurance and reinsurance are the most common measures. Commercial insurance market can only deal with insurable risks, and the insurability of catastrophic risks is limited by their characteristics. Reinsurance expands the scope of insurable risks, but still cannot solve the problems of lack of capital of the insurance market, the ambiguity of catastrophic risks, the adverse selections, etc.The expansion of the definition of insurability from commercial insurance market to the whole private economy provides the theoretical base for the capital market to deal with the catastrophic risks. The securitization of catastrophic risks partly solves the problem of lack of capital of insurance market, but the high expenses and the lack of liquidity limit the application of the insurance-linked securities. And the securitization cannot solve the problems of adverse selections, etc.The market failure of catastrophic insurance market necessitates the government...