The Flood Issue: Uniform Insurance and Collective Prevention with Risk Externalities

Prevention policies against flood, such as dams or levees, are commonly designed by local jurisdictions and for most they exert externalities on neighboring jurisdictions. Each jurisdiction chooses its collective prevention effort depending on the insurance system that covers its inhabitants. As uniform insurance depends on all insureds’ risk, it enables a partial integration of prevention externalities by jurisdictions. We determine under which condition uniform insurance Pareto dominates actuarial insurance.