Risk Classification in Natural Catastrophe Insurance: The Case of Italy

Abstract

The role of risk classification as a remedy for asymmetric information market failure is widely recognized and adverse selection is commonly expected to cause market failure also in natural disaster insurance market. Actually, natural catastrophe insurance is a hot topic for the fact that national governments need to build a system to face the high cost of disaster assistance and damage compensation. But an efficient natural disaster insurance is based also on a coherent risk classification and this is the key point of the paper. We argue that issues of risk classification should be a major concern in the design of natural disaster insurance, especially in countries, such as Italy, with a so low penetration of this kind of insurance. The paper is structured as follows. Section 2 provides information on the Italian NatCat insurance. Section 3 describes risk classification looking at the demand side of the market. Section 4 analyses adverse selection in NatCat insurance market and the role of risk classification. Section 5 concludes.