Strategic competition in informal risk sharing mechanism versus collective index insurance

Paper: arXiv 2508.02684

Authors: Lichen Wang, Shijia Hua, Yuyuan Liu, Zhengyuan Lu, Liang Zhang, Linjie Liu, Attila Szolnoki

Abstract

The frequent occurrence of natural disasters has posed significant challenges to society, necessitating the urgent development of effective risk management strategies. From the early informal community-based risk sharing mechanisms to modern formal index insurance products, risk management tools have continuously evolved. Although index insurance provides an effective risk transfer mechanism in theory, it still faces the problems of basis risk and pricing in practice. At the same time, in the presence of informal community risk sharing mechanisms, the competitiveness of index insurance deserves further investigation. Here we propose a three-strategy evolutionary game model, which simultaneously examines the competitive relationship between formal index insurance purchasing (I), informal risk sharing strategies (S), and complete non-insurance (A). Furthermore, we introduce a method for calculating insurance company profits to aid in the optimal pricing of index insurance products. We find that basis risk and risk loss ratio have significant impacts on insurance adoption rate. Under scenarios with low basis risk and high loss ratios, index insurance is more popular; meanwhile, when the loss ratio is moderate, an informal risk sharing strategy is the preferred option. Conversely, when the loss ratio is low, individuals tend to forego any insurance. Furthermore, accurately assessing the degree of risk aversion and determining the appropriate ratio of risk sharing are crucial for predicting the future market sales of index insurance.

Complexity vs Empirical Score

• Math Complexity: 7.0/10
• Empirical Rigor: 3.0/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a sophisticated theoretical framework using three-strategy evolutionary game theory, CRRA utility functions, and Markov processes to model index insurance competition with informal risk sharing. However, it relies entirely on mathematical simulations without empirical backtesting or real-world disaster/claims datasets to validate the behavioral parameters.

Research Flowchart

  flowchart TD
    A[Research Goal: Model Competition Between<br>Index Insurance, Informal Risk Sharing & Non-Insurance] --> B[Inputs: Basis Risk, Risk Loss Ratio,<br>Risk Aversion & Risk Sharing Ratio]
    B --> C[Construct Three-Strategy Evolutionary Game Model<br>Strategies: Insurance I, Sharing S, No-Insurance A]
    C --> D[Compute Payoff Matrices & Insurance Company Profits]
    D --> E[Simulate Evolutionary Dynamics & Optimal Pricing]
    E --> F[Outcomes: High Loss/Low Basis Risk -> Insurance I<br>Moderate Loss -> Risk Sharing S<br>Low Loss -> No Insurance A]

Cited References (53)

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2. Dull Disasters? How planning ahead will make a difference (2016)
3. Influence of extreme weather disasters on global crop production (2016)
4. The epidemiology of extreme weather event disasters (1969-2018) (2020)
5. Effects of natural disasters on social and economic well being: A study in \protect Nigeria (2016)
6. Climate change, extreme weather events, and human health implications in the \protect Asia Pacific region (2016)
7. Disaster, demographics, and vulnerability: Interrogating the long-term effects of an extreme weather event (2022)
8. The trap of climate change-induced “natural” disasters and inequality (2021)

0 of 53 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.