La Crema: A Case Study of Mutual Fire Insurance

We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto-efficient allocation reachable through the mechanism requires that all households honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case in which the property values are identical for all households. Nevertheless, as the size of the society becomes large, the benefits from deviating from truthful reporting vanish, and all the nondegenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

[1]  H. Peyton Young,et al.  Individual Strategy and Social Structure , 2020 .

[2]  C. Williams,et al.  Risk management and insurance , 1976 .

[3]  Reactive Risk and Rational Action: Managing Moral Hazard in Insurance Contracts , 1986 .

[4]  Ricardo S Silva.  Source , 2000, BMJ : British Medical Journal.

[5]  J. Brutails.  La coutume d'andorre , 1904 .

[6]  Luis C. Corchón.  The Theory of Implementation of Socially Optimal Decisions in Economics , 1996 .

[7]  Harry D. Garber.  Considerations in a Mutual Life Insurance Company Conversion , 1993 .

[8]  Miles S. Kimball,et al.  Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey , 1995 .

[9]  L. E. Clarke,et al.  Probability and Measure , 1980 .

[10]  Stephen Coate,et al.  Rotating Savings and Credit Associations, Credit Markets and Efficiency , 1994 .

[11]  James R. Marsden,et al.  An Examination of Market Efficiency in British Racetrack Betting , 1990, Journal of Political Economy.

[12]  Dolors Comas d’Argemir,et al.  Andorra, un país de frontera: estudi etnogràfic dels canvis econòmics, socials i culturals , 1997 .

[13]  R. Townsend,et al.  The medieval village economy : a study of the Pareto mapping in general equilibrium models , 1994 .

[14]  M. Fafchamps.  Risk sharing and quasi-credit , 1999 .

[15]  P. Bennett,et al.  Mutuality at a Distance? Risk and Regulation in Marine Insurance Clubs , 2000 .

[16]  Alex Kane,et al.  Measuring Risk Aversion from Excess Returns on a Stock Index , 1991 .

[17]  Graciela Chichilnisky,et al.  Individual Risk and Mutual Insurance , 1996 .

[18]  F. Scott,et al.  LOTTERY EFFECTS ON PARI-MUTUEL TAX REVENUES , 1989, National Tax Journal.

[19]  George G. Szpiro.  Measuring Risk Aversion: An Alternative Approach , 1986 .

[20]  G. G. Coulton.  The Medieval Village , 1989 .

[21]  H. Young.  Individual Strategy and Social Structure , 2020 .

[22]  Edmond Malinvaud,et al.  Markets for an Exchange Economy with Individual Risks , 1973 .

[23]  Timothy Besley,et al.  The economics of rotating savings and credit associations , 1990 .