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Model assessment of public–private partnership flood insurance systems: an empirical study of Japan

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Abstract

The public–private partnership (or PPP) system is widely hailed as an effective approach to flood insurance. PPP effectiveness can be empirically demonstrated through an analytic framework based on model assessment, which we apply to Japan as an illustrative case study. We first introduce the widely-observed market failure phenomenon in the catastrophe insurance sector and how PPP systems may serve to avert this failure. We then proceed to select three candidate systems and model them respectively. Subsequently, we employ empirical data and Monte Carlo simulations to evaluate suitability for Japan’s case via three perspectives. The results identified the market-oriented system as the economically-optimal choice. It should be noted, however, that the assessment is dependent on the priorities of each party and market-negotiated results. We find this methodology to be suitable for identifying the most adequate PPP system and invite policymakers to consider its use when implementing their own systems.

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Notes

  1. Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and Homeowners Flood Insurance Affordability Act of 2014 (HFIAA).

  2. The General Insurance Association of Japan: https://www.sonpo.or.jp/report/statistics/syumoku/index.html.

  3. The proportion can be retrieved from 50-year History of JER, p. 92.

  4. Data available at: https://www.e-stat.go.jp/stat-search/files?page=1&toukei=00600590.

  5. Data available from the Geospatial Information Authority of Japan: https://www.gsi.go.jp/KOKUJYOHO/MENCHO202001-index.html.

  6. We choose the house insurance policy of MSIG as representative. Damage over 30% of the total insured value will be indemnified by \({\text{insured amount}} \times \frac{{\text{total loss}}}{{\text{insured value}}} \times 70\%\) (with a 70% up limit); damage between 15 and 30% of the total insured vale will be indemnified by 10% of the insured amount; and only 5% of the insured amount will be indemnified if the damage is less than 15% of the insured value.

  7. MLIT, Flood Management Survey Manual (draft). Available at: https://www.mlit.go.jp/river/basic_info/seisaku_hyouka/gaiyou/hyouka/h1704/chisui.pdf.

  8. The take-up rate of flood insurance can be retrieved from GIROJ. Available at: https://www.giroj.or.jp/databank/attachment_ratio_flood.html.

  9. Expense ratio is equal to expense divided by net premium. The average number is calculated based on historical data from 1995 to 2019, retrieved from: https://www.sonpo.or.jp/member/gaikyou/index.html.

  10. When simulating the insured loss, first we simulate the logarithm loss and then exponentiate with the equation \(\ln \left( {{\text{X}}_{1} + {\text{X}}_{2} } \right) = {\text{lnX}}_{1} + {\text{ln}}\left( {1 + {\text{e}}^{{{\text{lnX}}_{2} - {\text{lnX}}_{1} }} } \right)\) to calculate the annual loss.

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Acknowledgements

Deepest gratitude goes to Professor Satoshi Nakaide, for his constant encouragement and guidance. The author is also deeply indebted to Professor Sharon Tennyson from Cornell University for her instructive advice and kind help. The author would also like to thank Mr. Akifumi Kusano from Waseda University for his kind help with data collecting. Highest respect goes to the anonymous referees and editors for their constructive comments on this work.

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Correspondence to Jie Shao.

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Shao, J. Model assessment of public–private partnership flood insurance systems: an empirical study of Japan. Geneva Pap Risk Insur Issues Pract 47, 79–102 (2022). https://doi.org/10.1057/s41288-021-00213-x

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