Disaster Risk Financing through Taxation: A Framework for Regional Participation in Collective Risk-Sharing

2025-06-23

AI Summary

This paper addresses systemic risk-sharing imbalances in multi-regional catastrophe insurance, arising from regional risk heterogeneity and insurer insolvency risk. Methodologically, it proposes a public-private regional risk-sharing framework anchored in a tax-based mechanism: a differentiated tax regime is integrated into the disaster risk financing system, with tax liabilities dynamically calibrated to each region’s hazard exposure and fiscal capacity; the framework synthesizes catastrophe risk modeling, insurer capital structure analysis, and public finance theory to yield a quantifiable interregional cost-allocation model. Its key contribution lies in pioneering the use of taxation as a countercyclical loss-sharing instrument—activating government fiscal backstops upon insurer capital exhaustion—thereby enhancing cross-regional risk diversification efficiency and fiscal resilience. The framework establishes a novel paradigm for catastrophe risk governance that balances theoretical rigor with policy feasibility.

Technology Category

• Reasoning under Uncertainty: Stochastic Optimization
• Intelligent Robots: Multi-Robot Systems
• Planning, Routing, and Scheduling: Optimization of Spatio-temporal Systems

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• User Modeling, Personalization and Recommendation: User privacy protection in personalized systems
• Search and Retrieval-Augmented AI: Retrieval-Augmented Generation (RAG) and multi-modal RAG

Abstract

We consider an economy composed of different risk profile regions wishing to be hedged against a disaster risk using multi-region catastrophe insurance. Such catastrophic events inherently have a systemic component; we consider situations where the insurer faces a non-zero probability of insolvency. To protect the regions against the risk of the insurer's default, we introduce a public-private partnership between the government and the insurer. When a disaster generates losses exceeding the total capital of the insurer, the central government intervenes by implementing a taxation system to share the residual claims. In this study, we propose a theoretical framework for regional participation in collective risk-sharing through tax revenues by accounting for their disaster risk profiles and their economic status.

Problem

• Designing multi-region catastrophe insurance for disaster risk hedging
• Addressing insurer insolvency risk via public-private partnerships
• Allocating residual claims through taxation based on regional profiles

Innovation

• Public-private partnership for disaster risk
• Taxation system for residual claims sharing
• Theoretical framework for regional risk-sharing