Abstract

This paper quantifies cross-subsidies in Norway’s natural perils insurance scheme, where a uniform premium is charged regardless of location-specific natural hazard risk. Using individual property data, hazard zone maps, and municipal insurance payouts, I estimate the actuarially fair premiums inside and outside high-risk areas that would apply under a two-tier risk-based scheme. The results show that uniform pricing leads to substantial redistribution, implicitly subsidizing high-risk properties. Focusing on households and flood risk, I find that the actuarially fair premium in flood zones would be about 13 times higher than the uniform flood premium charged today, and approximately 65 times higher than in non-flood zones. These cross-subsidies imply extensive sharing of the risks and losses related to natural disasters, but likely reduce incentives and impede effective adaptation. The findings shed light on the trade-offs between efficiency and distribution in natural perils insurance, and inform broader discussions on scheme design.