Insurance Against Catastrophe: Government Simulation of Insurance Markets for Catastrophic Events

As a result of climate change, technological development, and other variables, natural and technological catastrophes have increased dramatically. Moreover, due to infrastructural issues, such as building in floodplains, damages resulting from catastrophes have increased as well. The massive earthquake and tsunami that occurred in Japan on March 11, 2011 are still fresh in people's memories, providing sobering illustrations of the extensive reach of such catastrophes. After a catastrophe, which is defined for the purposes of this Article as an accident with large losses in either the number of victims or the amount of property damage, governments often intervene in the compensation of catastrophe victims.

However, the organization of government intervention in the compensation varies from one country to another and from one disaster to another. Governments intervene either because no satisfying solution is available in the private market or to fulfill the requirements of existing compensation schemes. Political pressure for such intervention may also be large. Private insurance markets for catastrophic risks may fail for a variety of reasons, and governments may try to intervene to stimulate the insurability of catastrophic risks or to take over insurance functions when markets fail.

Demand for catastrophe insurance may be too low even though such insurance would result in increased utility for potential victims (as in the case of flood insurance). In other cases, risk-modeling calculations may be difficult or the damage that could potentially be caused by a catastrophe may overwhelm the capacity of insurance markets.