Risk Selection in Natural-Disaster Insurance

It is widely recognized that market failure prevents efficient risk sharing in natural-disaster insurance, leading to several public private partnership arrangements across the globe. We argue that risk selection by the private partner is potentially an important issue. We illustrate our concerns with a simple model of reinsurance in a natural-disaster insurance market, based on the French system. Risk selection is a likely equilibrium outcome. Notably, the policies implemented by the French government correspond to the ones we identify to alleviate risk selection. Next, we discuss two public private partnership settings that deal effectively with risk selection: Florida and Spain. (JEL: G 22, L 11, Q 54)