Catastrophe Risk Financing System And Governmental Intervention

Flood, hurricane(typhoon) and earthquake are main natural catastrophes in the world. These perils are usually categorized as uninsurable risks by private insurers for reasons of adverse selection, inadequate spread of risk and difficulty in accurate loss assessment. In particular when private insurers are not able to provide catastrophe insurance at actuarially sufficient rate due to regulatory suppression in rating the availability and affordability problems of catastrophe insurance thus occur. This problem arises not only in developing countries, say China, but also in developed countries including U.S..As private insurers can't provide catastrophe insurance it's natural that people expect the government will step in to fill the void. The US federal government established National Flood Insurance Plan (NFIP) in as early as 1968 followed by some more state programs focusing on the specific catastrophes in their own states. These government programs differ from each other in some aspects regardless they are aimed at a consistent goal of addressing imperfections of property insurance market. Different types of US federal and state government insurance programs in operation and under discussion are reviewed in this study deepened by comparison study of the programs according to several criterions that an ideal government program should carry. Advantages and disadvantages of each program are discussed in respect of their coverage, participation, mitigation, subsidiary, operating efficiency, solvency after disaster and impact on insurance industry.Based on the comparison study of the U.S. government insurance programs this study put forward some proposals on developing catastrophe risk management system in China. The suggested system is featured by an integrated or all risk property policy, diversified and layered risk financing methods, private sector domination, government support and sustainable development.