A Well-Designed Implement for Promoting Population Health and Property via Insurance

Abstract

The frequency and intensity of catastrophes (including natural disasters and pandemics) rise and damage the population's health, life and property more seriously. In order to protect population health and wealth via full insurance indemnity, many countries set up a public catastrophe insurance scheme (PCIS) to maintain the function of catastrophe insurance markets. Little literature discusses the smart payment way of contributions charged by PCIS. This article design a model to describe the upward trend and cyclic frequency and intensity of catastrophic events. Such characteristics also promote the business cycle of the insurance industry. We analyze the changes in catastrophic insurer's capital structures under three cases of that the volume-based charges to the PCIS may come from equity holders or policyholders or both. PCIS may entail a shift of equity capital toward minimum solvency requirements, and then adverse incentives regarding insurer's security level arise. Various numerical experiments illustrate the changes in equity position, default probabilities, or expected policyholder deficits. The results show that the payment way of contributions should be designed carefully, not only with regard to PCIS's finance balance but also the resultant incentives and effects.