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This paper proposes a public-private insurance scheme for earthquakes andfloods in Italy in which property-owners, the insurer and the governmentco-operate in risk financing. Our model departs from the existing literature bydescribing a public-private insurance intended to relieve the financial burdenthat natural events place on governments, while at the same time assistingindividuals and protecting the insurance business. Hence, the business isaiming at maximizing social welfare rather than profits. Given the limitedamount of data available on natural risks, expected losses per individual havebeen estimated through risk-modeling. In order to evaluate the insurer's lossprofile, spatial correlation among insured assets has been evaluated by meansof the Hoeffding bound for r-dependent random variables. Though earthquakesgenerate expected losses that are almost six times greater than floods, wefound that the amount of public funds needed to manage the two perils is almostthe same. We argue that this result is determined by a combination of the riskaversion of individuals and the shape of the loss distribution. Lastly, sinceearthquakes and floods are uncorrelated, we tested whether jointly managing thetwo perils can counteract the negative impact of spatial correlation. Somebenefit from risk diversification emerged, though the probability of thegovernment having to inject further capital might be considerable. Our findingssuggest that, when not supported by the government, private insurance mighteither financially over-expose the insurer or set premiums so high thatindividuals would fail to purchase policies.

A Public-Private Insurance Model for Natural Risk Management: an Application to Seismic and Flood Risks on Residential Buildings in Italy