Optimal Risk-Sharing Mechanism to Enhance Resilience of Communities

Abstract

Resilience of urban communities hit by extreme events relies on the prompt access to financial resources needed for recovery. Therefore, the functioning of physical infrastructures is strongly related to that of the financial system, where agents operate in the markets of insurance contracts. When the financial capacity of an agent is lower than the requests for funds from the communities, it defaults and fails at providing these requests, slowing down the recovery process. In this work, we investigate how the resilience of urban communities depends on the reliability of the financial agents operating in the insurance markets, and how to optimize the mechanism adopted by these agents to share the requests for funds from the policyholders. We present results for a set of loss functions that reflect the costs borne by society due to the default of the financial agents.