Insurance and Catastrophes

If the insured can tilt losses towards catastrophes, or if his efforts will do the most to reduce catastrophes, either by reducing probabilities or reducing magnitudes, then traditional lessons about the form of optimal insurance are likely to be wrong.35 Even if the insurance company is risk neutral and has infinite resources, it should keep the insured at some risk when losses are high. And the insured, who in our formulation reaps any savings in the form of reduced premiums from stronger incentives for care, has the same interest as the insurer in finding the optimal form of policy.