Title : Rooted protection: Designing optimal joint contract for realising the complementarity of forest-based solutions and financial insurance.
Author(s) : Sandrine Brèteau-Amores, Julien Jacob, Roland Olschewski, Rasoul Yousefpour, Marc Hanewinkel
Abstract : As natural hazards increasingly threaten mountainous areas, Improved Forest Management (IFM) presents a promising Nature-Based Solution. We develop a Principal-Agent model where a houseowner uses both IFM and financial insurance. We demonstrate a perfect complementarity: forests filter low-severity harms, enabling insurers to provide affordable coverage for residual tail risks. This combination resolves the traditional partial insurance puzzle, enabling high or even full coverage despite unfair premiums. However, as this hybrid strategy reduces insurers’ profits, private markets fail to incentivize socially optimal levels of protection. Thus, public intervention or public insurers are needed to align private incentives with social welfare.
Key-words : Nature-based solutions; Natural hazards; Financial insurance; Principal-Agent model; Forest management; Moral hazard.
JEL Classification : G22, Q54, D86.
