Market Incentives for Private Insurance Markets: Literature Review

Prepared by:

Meri Davlasheridze, Samuel Brody, Wesley Highfield

Prepared for:

Texas Department of Insurance

Publication Date:

October 2, 2020

This document provides a comprehensive literature review associated with the issues of private insurance to provide risk-bearing capability against catastrophic disaster losses. While the primary focus of the review is to inform market incentives for wind/hail insurance, examples from other catastrophe insurance markets, such as flood insurance, are also drawn. We proceed as follows. In Section 2, we first review features of catastrophic insurance markets, focusing on challenges posed by fat tails, spatially correlated risks and tail dependence. We then move to describing market forces and the market structure from both the supply and demand sides and highlight several important aspects for market functionality (Section 3). These cover costs to insurers and their degree of risk aversion and heuristics (i.e., availability bias) that may play a role in limiting consumers’ insurance decisions, among other factors, including government disaster programs perceived as insurers of last resort.