The recipient of the 2009 Witt Award was Pierre Picard, Ecole Polytechnique, France, for “Natural Disaster Insurance and the Equity-Efficiency Trade-Off,” March 2008, Volume 75, Issue 1, pages 17-38.
This article investigates the role of private insurance in the prevention and mitigation of natural disasters. We characterize the equity-efficiency tradeoff faced by the policymakers under imperfect information about individual prevention costs. It is shown that a competitive insurance market with actuarial rate making and compensatory tax-subsidy transfers is likely to dominate regulated uniform insurance pricing rules or state-funded assistance schemes. The model illustrates how targeted tax cuts on insurance contracts can improve the incentives to prevention while compensating individuals with high prevention costs. The article highlights the complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdictions where risk management plans are enforced.