A Disaster Under-(Re)Insurance Puzzle: Home Bias in Disaster Risk-Bearing

Abstract

We examine disaster reinsurance from the perspective of international risk-sharing. We find that losses from disasters are shared internationally to a generally very limited extent, unlike what the theory of international risk-sharing suggests. We propose a new dataset of cross-border reinsurance payments for 93 disasters of 44 economies in 1982–2017. Combining these balance of payments data with industry data, we find that the lack of disaster risk-sharing through international reinsurance results from low participation in primary insurance as well as limited use of reinsurance. Regression analysis finds that countries with higher levels of economic or financial development tend to insure a larger share of disaster losses while proxies for disaster myopia are associated with less insurance. Regarding the share of insured losses that is internationally reinsured, small size and de facto financial integration tend to raise the reinsurance share, while high levels of external wealth and low foreign firm presence in insurance are associated with less reinsurance. Advanced economies with little fiscal space that provide ex-post government disaster insurance without international reinsurance could experience disaster risk morphing into financial risk.

“How Do Shocks Affect International Reserves? A Quasi-Experiment of Earthquakes”

“…Countries might also accumulate foreign exchange from international (re)insurance payments. Ito and McCauley (2019) show empirical evidence that the international reinsurance share is positively associated with IR. They also found that losses from disasters are only shared internationally to a very limited extent across countries; the average portion of economic damage offset by reinsurance is less than 5%.…”

Essays on Economic Impacts of Disasters: The Aggregate and Disaggregate Evidence

“…In New Zealand, insurance coverage is over 95% for residential buildings, and international reinsurance covered half of the losses from disasters in New Zealand (Reserve Bank of New Zealand, 2011). Japan, however, has a much lower insurance coverage with a relatively low rate of international reinsurance (Ito and McCauley, 2019;Nguyen and Noy, 2020). Quake-affected countries also have to consider a tradeoff between IR holding and its opportunity costs.…”

“…The insured loss was about US$35 to US$40 billion, however, the share of international risk sharing was not high in Japan. In particular, international reinsurance only covered about 4% of the overall residential loss (Ito and McCauley, 2019). The main public earthquake insurance system in Japan is run by the Ministry of Finance, and it pools and redistributes the risk.…”