How does sharing climate risks through public-private partnerships affect prevention incentives?

• Applicant: Tim Philippi
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 569352017

Many climate risks such as floods, wildfires or droughts cause severe financial losses. Despite these frequent natural disasters, exposed individuals often do not insure their property against these climate risks. When many people are affected by a natural disaster but insurance participation is low, governments are often pressured into providing tax-financed disaster relief payments to the uninsured. These disaster relief payments may further crowd out insurance demand. To avoid crowding out of private insurance demand, governments often form public-private partnerships to reallocate disaster relief payments towards subsidizing insurance markets and encouraging higher insurance demand. The government subsidizes insurance markets either through premium subsidies or through subsidizing reinsurance markets and private insurance companies sell the contracts, service customers and handle claims. The goal of the project is to examine how sharing risks between the government and private insurance companies through public-private partnerships affects prevention incentives. These prevention incentives include private prevention by individuals and public prevention by communities. The project is split into three subprojects. The goal of the first subproject is to understand the trade-offs for individuals and for governments when public-private partnerships interact with private and public prevention in a theoretical model. The government decides between reallocating disaster relief payments towards subsidizing insurance markets and investing in public prevention. The individual decides between buying subsidized insurance, taking up private prevention and relying on disaster relief payments. The goal of the model is to isolate the determinants of the trade-offs to understand the implications of reallocating disaster relief payments. The theoretical predictions from the first subproject are tested in two following empirical subprojects. Each of the two empirical subprojects examines one of the two largest public-private partnerships for sharing climate risks – the U.S. Federal Crop Insurance Program and the U.S. National Flood Insurance Program. The second subproject uses data from the U.S. Federal Crop Insurance Program and the goal is to examine how premium subsidies affect farmers’ private prevention activities such as irrigation of crops. The third subproject uses data from the U.S. National Flood Insurance Program and studies how investments in public prevention such as risk communication or levees affects insurance demand and prevention of individuals.

• DFG Programme: WBP Fellowship
• International Connection: USA
• Host: Professor Philip Mulder, Ph.D.