Insurance Mechanism Design Of Catastrophe Risk And Insurance Rate Determination

China covers a vast area, which gives birth to variety of natural disasters. All kinds of disasters occur frequently. Direct economic losses caused by natural disasters every year is up to hundreds of billions. As a main relief way, government spending is inadequate. In China, insurance and charity industry started late and are still weak in the role of natural disaster risk release. Therefore, once the catastrophe occurs, the affected people will face crisis of survival. As people’s living standard is proving, demand for catastrophe insurance has become increasingly prominent. Government report and files of Eighteen Third Plenary Session referred to establish catastrophe insurance system. At the end of the year 2013,Shen Zhen and Yun Nan province have started to take catastrophe insurance into practice. CIRC developed a "three-line, quick march" catastrophe insurance system development strategy, and take building residential earthquake insurance system as a breakthrough. Based on these, the article attempts to explore the catastrophe risk insurance mechanism design, and research the pricing of residential earthquake insurance, in order to give full play to the role of insurance in disaster dispersing, providing disaster compensation and building an efficient, sustainable development catastrophe insurance system.Based on previous literature, firstly, the article proposed guidance advice in catastrophe defining, and analyzed risk characteristics of four most prominent catastrophes, such as floods, earthquakes, typhoons and droughts. I compared the difference between catastrophe risk and insurable risks, and mentioned barriers that may exist, and given ways to make catastrophe risk become insurable. The article explored suitable catastrophe insurance product system for China. The several key elements in insurance product design are given advices.Secondly, the article gives the insurance company’s expected loss model and the housing earthquake insurance pricing models. I proposed earthquake peak acceleration as the risk factor to react the earthquake intensity. The article uses earthquake loss data across the country to get a certain probability distribution, and considered the influence of climatic factors in disaster relief, and then adds the risk-sharing mechanism to reduce the premium. Taking residential earthquake insurance pricing of Yunnan for example, I select one year as insurance duration, and three countries of different levels of economic development. In addition, in this paper, three factors, which are discount rate, self-relief proportion and damaged area, affecting the premium of catastrophe insurance products are considered case studies. Ⅰ calculated interaction between these parameters and premiums, and gave a reasonable range of parameters, to provide a reference for different risk zoning in determining the premiums.Finally, this paper raises some suggestions for government’s support on catastrophe insurance, such as enacting related laws, increasing the investment on disaster prevention and reduction supplies, building management systems for catastrophe information, breaking through the traditional thinking, developing philanthropy, and so on.