Runhuan Feng (University of Illinois at Urbana-Champaign)
Abstract: In an increasingly sophisticated sharing economy, the concept of risk sharing has been popularized with the rise of peer‐to‐peer insurance at a micro level and catastrophe risk pooling at a macro level. This work aims to provide a novel theoretical framework for the understanding of peer‐to‐peer network structure in risk sharing.
In contrast with classic centralized risk sharing, the peer‐to‐peer risk sharing framework is proposed to take into account pair‐wise exchanges. The framework aims to develop risk allocation mechanisms that are structurally decentralized, Pareto optimal, and mathematically fair. In addition, a tiered hierarchical generalization is also constructed to improve computational efficiency. As an illustration, these techniques are applied to a flood risk pooling example. Flood risk is known to be difficult to cover in practice, which contributes to the stagnant development for a private insurance market. It is shown that peer‐to‐peer risk sharing techniques provide an economically viable alternative to traditional flood policies.
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