Community rating, cross subsidies and underinsurance: Why so many households in Japan do not purchase earthquake insurance

Michio Naoi, Miki Seko, Kazuto Sumita

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

A theoretical framework and empirical evidence are presented to show the connection between community uniform rating and cross-subsidies in earthquake insurance policy in Japan. Cross-subsidies are defined as the difference between a fair actuarial premium and the community uniform rate. The estimation result shows that the uniform community rating may unintentionally cross-subsidize inhabitants in high risk areas at the expense of inhabitants in low risk areas. Our simulation results indicate that replacing the current community rating with the fair actuarial premium would increase the overall subscription rate for earthquake insurance by about 3.7 percentage point, and that the increase is particularly prominent in relatively less risky areas. We propose modifying the Japanese earthquake insurance system by adopting a more refined risk rating system that more closely reflects regional differences in earthquake risk.

Original languageEnglish
Pages (from-to)544-561
Number of pages18
JournalJournal of Real Estate Finance and Economics
Volume40
Issue number4
DOIs
Publication statusPublished - 2010 Apr

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subsidy
insurance
purchase
natural disaster
rating
Japan
earthquake
premium
inhabitant
community
insurance system
subscription
regional difference
simulation
household
Cross-subsidies
Purchase
Insurance
Community rating
Earthquake

Keywords

  • Cross-subsidization
  • Earthquake insurance
  • Japan
  • Risk

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics
  • Urban Studies

Cite this

Community rating, cross subsidies and underinsurance : Why so many households in Japan do not purchase earthquake insurance. / Naoi, Michio; Seko, Miki; Sumita, Kazuto.

In: Journal of Real Estate Finance and Economics, Vol. 40, No. 4, 04.2010, p. 544-561.

Research output: Contribution to journalArticle

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