Comment on “Disasters, Household Decisions, and Insurance Mechanisms: A Review of Evidence and a Case Study from a Developing Country in Asia”

• Published date: 01 January 2017
• Author: Keijiro Otsuka
• Date: 01 January 2017
• DOI: http://doi.org/10.1111/aepr.12156

Comment on “Disasters, Household Decisions,

and Insurance Mechanisms: A Review of

Evidence and a Case Study from a Developing

Country in Asia”

Keijiro OTSUKA†

Kobe University

JEL codes: D80, G22, I3, O1

The paper by Sawada (2017) on disasters and insurance in Asia is a highly ambitious and

useful study,which attempts to assessthe extent of the mitigationof consumption reduction

caused by disasters by means of insurance based on a literature review and a case study in

Vietnam.

Since the finalversion of the paper has successfullyincorporated manyof the comments

made on an earlier version, I do not have many comments except for a few concerns.

Sawada (2017, p. 18) states in his abstract that “it is imperative to strengthen market,

government, community based insurance mechanisms to diversify aggregate disaster risks

at individual, national, and regional levels in Asia.”I wonder if this concluding statement

can be justified from the present study because there are costs involved in strengthening

the insurancemechanisms, whereas the costside is not analyzed in Sawada’sstudy.Itseems

to me that in order to justify this argument, the sources of market failures should be

discussed and analyzed more explicitly.

More generally, Sawada seems to assume implicitly that “full insurance”or “more

insurance”is socially desirable. This may or may not be the case because of moral hazard

issues. In the real world where information asymmetry is present, moral hazard is a real

issue. I expect that the moral hazard would occur rampantly with a full insurance scheme,

which actually implies that full insurance would break down. I definitely do not think that

full insurance is socially desirable.

I am surprised to lear n that “the fullconsumption risk sharing hypothesisholds for the

commune level risk sharing network.”This is not the case for larger networks. I simply

cannot believethat full insurance at the commune levelis achieved unless commune people

help one another based on community ties. Sawada points out that there are six

mechanismsfor coping with risk: (1) consumptionreductions; (2) dissaving;(3) borrowing;

(4) public transfers; (5) private transfers; and (5) additional labor income. The question is

which mechanisms for coping with risk are important and unique at the commune level,

but not at thelevel of larger networks. Intuitively, I thoughtthat it would be private transfers

†Correspondence:Keijiro Otsuka, GraduateSchool of Economics, KobeUniversity, 2-1 Rokkodaicho,

Nada-ku, Kobe 657-0014, Japan. Email: otsuka@econ.Kobe-u.ac.jp

doi: 10.1111/aepr.12156 Asian EconomicPolicy Review (2017) 12, 43–44

©2017 JapanCenter for EconomicResearch 43

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