Author
Ruo Jia (ruo.jia@pku.edu.cn) .
Hanyang Wang (wanghy67@pku.edu.cn) are affiliated with the School of Economics, Peking University.
Jieyu Lin (linjy18@mails.tsinghua.edu.cn) is affiliated with the School of Economics and Management, Tsinghua University.
Abstract
Little is known about how an ex-ante public-private risk-sharing program affects the efficiency of a catastrophe risk market and the behavior of market players. We develop a dynamic game model that analyzes three decision makers—individuals, a private insurer, and a government acting as reinsurer—to derive their optimal pricing, capital, and purchasing decisions for efficient catastrophe risk-sharing. In the equilibrium, government reinsurance addresses private insurance market failure and improves social welfare through the product quality and capital cost channels. The effects of these two channel s wax and wane depending on the market structure. As a tradeoff, government reinsurance may decrease individuals’ expected utilities and increase the insurer's default probability as competition is insufficient in catastrophe insurance markets. In the context of COVID-19, we show that government reinsurance can improve the viability and efficiency of pandemic insurance but should be coupled with anti-monopoly and social-distancing policies to mitigate its downside.
Keywords:
catastrophe risk management, efficient risk-sharing, government intervention, publicprivate partnership, pandemic risk
JEL: D81, G22, G52, H84, Q54
Download：
Public-Private Pandemic Risk-Sharing.pdf
