Disaster Risk Financing through Taxation: A Framework for Regional Participation in Collective Risk-Sharing

TL;DR

This paper develops a theoretical framework for regional disaster risk financing via taxation within a public-private partnership, addressing systemic risks and insurer insolvency concerns.

Contribution

It introduces a novel model for regional participation in collective risk-sharing through taxation, considering systemic disaster risks and insurer default scenarios.

Findings

Framework accounts for systemic disaster risks and insurer insolvency.

Proposes taxation-based risk-sharing among regions and government intervention.

Enhances understanding of regional disaster risk financing mechanisms.

Abstract

We consider an economy composed of different risk profile regions wishing to be hedged against a disaster risk using multi-region catastrophe insurance. Such catastrophic events inherently have a systemic component; we consider situations where the insurer faces a non-zero probability of insolvency. To protect the regions against the risk of the insurer's default, we introduce a public-private partnership between the government and the insurer. When a disaster generates losses exceeding the total capital of the insurer, the central government intervenes by implementing a taxation system to share the residual claims. In this study, we propose a theoretical framework for regional participation in collective risk-sharing through tax revenues by accounting for their disaster risk profiles and their economic status.