COMPARISON OF ALTERNATIVE NATIONAL RISK TRANFER SYSTEMS… · COMPARISON OF ALTERNATIVE NATIONAL...
Transcript of COMPARISON OF ALTERNATIVE NATIONAL RISK TRANFER SYSTEMS… · COMPARISON OF ALTERNATIVE NATIONAL...
COMPARISON OF ALTERNATIVENATIONAL RISK TRANFER SYSTEMS:
A “fundamental” view
JOANNEUM RESEARCH – Graz Institute of Technology and Regional Policy (InTeReg)
Joint Seminar of the University of Innsbruck and alpSFinancial Risks of Natural Hazards: Markets and the Role of the State
INNSBRUCK, July 5-6, 2007
Franz Prettenthaler & Nadja Vetters
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Designing national risk transfer mechanisms is a matter of dynamic mechanism design
• Mechanisms implement social choice functionsThe „Fundamentals“ of RTMs therefore are to be found in Dynamic Social Choice theory under risk
• Harsanyi (1955) shows that VNM axioms imply utilitarianism• Myerson (1981) shows the problem of dynamic inconsistencies
in egalitarian social choice• Mongin (1995) generalises Harsanyis results for SWFL• Prettenthaler (2002) shows the coherence of Myerson‘s and
Mongin‘s resultsFacing natural catastrophies, egalitarianism is a popular viewAre egalitarian RTMs necessarily dynamically inconsistent and therefore inefficient?
Motivation
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Setting the „fundamental“ scene for RTMs• Mechanism Design based on Social Choice Theory• VNM axioms and Social Choice Theory• Dynamic Consistency & Utilitarianism vs. Egalitarianism
Numeric Example• To expose the problem• To set up the comparative framework
Some national RTMs
A „fundamental“ comparison
Overview
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Theory behind: a numerical example (1)
Two individuals A, B
3 periods
Period 1 & 3: society decides
Period 2: nature decides
The result after period 3 is evaluated from an ethical perspective
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nF x’ (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
Period 1 Period 2 Period 3Potential flood
disaster
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2 Social Welfare Functions
Utilitarian: Wu(UA,UB) = UA+UB
Egalitarian: We(UA,UB) = min {UA,UB}
Evaluation of results
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nF x’ (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
contingent policy plans: e.g. (x; y‘,y‘)
Period 1 Period 2 Period 3
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Evaluation of the EXPECTED result (1)
E.g. ex ante approach
Utilitarian: Wu(EUA,EUB)
Egalitarian:We(EUA,EUB)
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511(6,5)(y;y',y')310(3,7)(y;y',x')29(7,2)(y;x',y')48(4,4)(y;x','x')612(6,6)(x;y',y')29(2,7)(x;y',x')311(8,3)(x;x',y')48(4,4)(x;x',x')
We(EUA,EUB)Wu(EUA,EUB)(EUA,EUB)Policy Plan
Max :
Therefore choose :
Evaluation of the EXPECTED result (2)
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nF x’ (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
We(4,4) = 4
We(4,4) = 4
We(12,2) = 2
We(0,10)= 0
Period 1 Period 2 Period 3
While:
But:
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nF x’ (4,4)
y' (0,10)
x' (4,4)x F
y' (12,2)
x' (4,4)nF
yy' (2,10)
x' (4,4)
F y' (10,0)
Wu(4,4) = 8
Wu(4,4) = 8
Wu(12,2) = 14
Wu(0,10)= 10
Period 1 Period 2 Period 3
Whereas:
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Egalitarianism seems to be in conflict with dynamic consistency
Up to now the ex ante approach was chosen
Ex post approach would mean:• First, the social welfare is calculated from the final
result• Secondly the expected value thereof is maximized
Oberservation
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111(y;y',y')310(y;y',x')29(y;x',y')48(y;x','x')212(x;y',y')29(x;y',x')311(x;x',y')48(x;x',x')
EVe(UA,UB)EVu(UA,UB)Policy Plan
Ex post evaluation
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Observation
Egalitarianism is not in conflict with dynamic consistency but
• Ex ante ex post equivalence
Under the ex post approach, egalitarians can choose dynamically consistent
• Price to pay: ex ante preferences of individuals cannot be fully respected
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Switzerland
Cantonal Property Insurance• mandatory (automatic) extension of coverage to
include natural hazards• Obligation to contract (monopoly position)• Unlimited coverage, low premiums• Reinsurance plus insurance pool (IRV, IRG)• Important role in prevention and spatial planning
Private insurance market (GUSTAVO cantons)• mandatory extension of coverage• Premiums not risk related• Elementary damage pool
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France
The “CAT NAT” insurance scheme• Private insurance carrier but regulated• mandatory extension of coverage to include
“exceptional natural hazards”• risk independent premium surcharge (in %)• Compensation demands governmental decision• Unlimited government reinsurance by CCR (adverse
selection problem stimulated reform)• Sliding scale for deductibles in communities without
risk prevention plans• No extension of coverage for new buildings in risk
zones after the publication of risk prevention plans
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Spain
Consorcio de Compensación de Seguros• Automatic coverage of „extraordinary events“
(compulsory insurance) when underwriting certain insurance contracts
• Monopoly position• Premiums risk independent• Profits and interests paid into a reserve pool• Distributed via private insurance companies, claim
settlement by the Consorcio• Unlimited state guarantee• Not very actively involved in prevention
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USA
National Flood Insurance Program• Optional coverage of flood damage in communities
participating in the Program• Communities have to develop risk management plans• Risk mapping via NFIP• Premiums depending on flood risk and quality of the
risk, partly subsidized• Distribution/claims settlement via licensed agents and
private insurance companies• State guarantee (loan of up to 1,5 billion US$)• Different incentives for communities and individuals
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Turkey
Turkish Catastrophe Insurance Pool• Launched 2000 with assistance from the World Bank• Compulsory insurance coverage for all residential
dwellings• Stand alone insurance policy• Risk related premiums (based on risk zone and type
of building)• Management “outsourced” to reinsurance company• Distribution through private insurance companies,
independent loss adjustors• tax-exempt• Actively involved in prevention and awareness raising
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Austria
private insurance market + public compensation fund
private insurance market:• low insurance penetration• very limited coverage• extended coverage only outside flood risk areas• Premiums are risk independent
catastrophe fund:• tax financed• compensation and prevention• compensation is limited
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Austrian Catastrophe Funds - Reserves
Development of Reserves
-200
-100
0
100
200
300
400
500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Development of Reserves
-200
-100
0
100
200
300
400
500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Rerserves without „skimming“
Reserves with „skimming“
Tax receipts
Expenditure
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Cross country comparison of RTM‘s (1)
state guarantee (loan of up to 1,5 billion US$)
-unlimited state guarantee
-Keep monopolies
unlimited state guarantee for CCR
ad hoc reliefRole of the state
NoNoYesYesYesYesYesBundle of natural hazards
YesYesYes(Yes)Yes(Yes)NoObligation to contract
Nocompulsory insurance
compulsory insurance (subsidiary)
mandatory extension of coverage
automatic extension of coverage
mandatory extension of coverage
NoMandatory insurance
NoYesYesNoYesNoNoMonopoly
National Flood Insurance Programme
public corporation
public corporation
Private insurance companies
Cantonal Property Insurance
private insurance companies
private insurance companies
Insurance Carrier
USATurkeySpainCH (Priv.)CH (CPI)FranceGermany
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Cross country comparison of RTM‘s (2)
adverse selection is a big problem
Compati-bilitywith EU legislation
CPI actively involved in prevention
CCR confronted with adverse selection
low insurance penetration
Further issues
state guarantee (loan of up to 1,5 billion US$)
insurance pool, intern. capital markets
reserve fund, unlimited state guarantee
insurance pool plus reinsurance
reinsurance plus insurance pool (IRV, IRG)
reinsurance (optionally with CCR), state guarantee
reinsurance
Coverage against catastro-phiclosses
risk-related, part. subsidized
risk-relateduniform plus risk loadinguniformuniform plus
risk loadinguniformrisk-relatedPremium design
USATurkeySpainCH (Priv.)CH (CPI)FranceGermany
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Classification of RTMs
Adverse selection
Adverse selectionresistant
Adverse selection resistant
Adverse selection
always coherent
always coherent
UT
EG
Ex postEx ante
ex ante ex post coherence
dynamically inconsistent
CHM
TR
USA
CHP
A
D
FUSA D
E
A
Anew
Thank you for your attention!