Prevention and insurance of natural disasters.

Summary Economic losses from natural disasters have increased globally faster than GDP over the past 30 years due to population growth and low levels of prevention in exposed regions. Moreover, only one third of these losses are insured and the low penetration of insurance generates wealth shocks for the affected populations. In this context and in the perspective of climate change, reducing natural disaster losses and increasing insurance coverage have become major issues for our societies, which are addressed in this thesis. The low levels of prevention and insurance can be explained by numerous market imperfections and deficient public policies, as explained in the introductory chapter of the thesis. A better understanding of these market problems and the role of public policy is needed to improve them. Chapter 2 focuses on prevention choices in the context of city development. Using an urban economics model, it shows that riskier areas are developed near the city center than far from the city center, investment in building resilience develops more concentrated cities, and riskier areas are less densely populated and generate more prevention. Furthermore, insurance subsidies lead to excessive exposure to risk through increased density in the riskiest areas and an overall decrease in resilience. This analysis illustrates the negative effects of subsidies and the role that urban public policies such as density restrictions or building codes can play. The following chapters address the issue of risk sharing in the context of risk correlation, a major feature of natural disaster risk. Using an economic model with potentially correlated individual risks, Chapter 3 demonstrates that a Pareto-optimal risk allocation can be achieved with competing insurance companies and a limited number of financial assets. This result, which is valid without market imperfections, requires in particular that agents are fully liable for the contracts signed in each state of nature. In practice, to limit defaults in catastrophic states, public policy requires that agents have financial reserves. Chapters 4 and 5 focus on the problem of risk correlation when these reserves are costly. Chapter 4 studies how the probability of a risk affects the choice of coverage of exposed individuals. It shows that individuals are more likely to insure for low probabilities than for high probabilities with standard insurance costs, but that the result is reversed when costs due to financial reserves are added. Chapter 5 analyzes the optimal form of insurance contracts when individual risks are correlated in a community. It shows that the optimal contract consists of partial insurance against individual risk, with lower coverage in catastrophic states than in normal states, plus potentially dividends in normal states. The final chapter concludes by opening up new research questions related to disaster prevention and insurance.