Regulation and Markets for Catastrophe Insurance

This paper discusses some of the problems associated with the efficient economic design of markets for catastrophe insurance and the regulation of private companies offering such insurance. The paper first considers the elements of the problem, on both the demand and supply side. On the demand side, we point to well-known difficulties of consumers and small businesses to evaluate the benefits of insurance relative to other approaches to risk bearing and risk mitigation. On the supply side, we note the inherent problems of insuring losses from natural hazards because of the correlated structure of the underlying loss distributions. Finally, regulatory problems associated with solvency, price and entry regulation for catastrophe insurance are analyzed. The paper concludes that the volatile mix of demand-side failures, supply-side complexities and regulatory manipulation are likely to make this area an important and difficult one for efficient eco-