Abstract: When individuals rely on assistance, rather than fully insuring against risks, the net welfare of society declines. Nevertheless, because beneficence is a positive and valuable trait, to disown it for the sake of economic efficiency could be imprudent. Instead I suggest a solution through the introduction of incomplete (non-indemnity) insurance. This paper shows that incomplete insurance is not only Pareto improving under these circumstances, but also provides an avenue to overcome the Samaritan's dilemma entirely. These results have a wide application to many forms of assistance including health care, disaster aid and social welfare. Further, the use of a market-based solution reduces distortions that are created by other policies such as subsidies.

Working Papers

The Better Trigger: Insuring against disaster risk
(with Christopher Woolnough New York University)

Abstract: Index triggers have enabled the extension of insurance to disaster risks by providing a simple mechanism to determine insurance payment. Disaster risks are notoriously difficult to insure against due to the covariant nature of risks, moral hazard and adverse selection. Index based risk transfer minimises these obstacles by not fully insuring the risk. This incompleteness generates basis risk, the risk that claims do not match losses. This paper analyses the upside basis risk (receiving a claim without a loss) and downside basis risk (having a loss but no claim) to determine a partial order ranking of indices for any risk averse individual. This partial ranking allows the selection of indices that are optimal for all risk averse individuals. Results demonstrate that correlation and covariance provide incorrect comparisons between indices.

Learning in Rare Risks and Asset Price Implications

Abstract: The impact of rare risks such as natural disasters, terrorism and epidemics are an increasing force in society. Unlike the case of common risks, our inexperience in rare risks creates differing views on the level of risk and the optimal form of risk management. Nonetheless, in both cases, the transfer of the financial risk can play a role in risk management. This paper illustrates how risk class impacts the price of risk transfer. In each risk class, two kinds of risk transfer assets are considered: an aggregate transfer (a share in an insurance company) and a disaggregated transfer specific to a particular risk (a catastrophe bond). Learning is harnessed to underline the differences between the risk classes and examine the change in prices over time. Results demonstrate persistent pricing benefits through disaggregation in rare risks. In contrast, these benefits are not maintained in common risks.