Natural disasters: Exposure and underinsurance in overseas France

The French overseas departments provide a rare natural experiment to analyze the implementation of a well-developed natural disasters insurance market in highly exposed regions such as Latin America, the Caribbean and other small island countries. Only half of households living in the French overseas departments have purchased home insurance, which includes coverage against natural disasters. This insurance penetration rate is certainly higher than in neighboring countries, but remains much lower than in continental France, where households are much less exposed and almost all insured. Using unique household-level micro-data, I estimate a theoretical model of insurance market which has not been empirically tested before. The structural approach enables to disentangle the different possible causes of underinsurance and to use a proof by elimination. Perception biases and relatively high insurance premiums are precluded. I show that underinsurance in the French overseas departments is mainly due to anticipated assistance, which crowds out insurance, and also to uninsurable housing.