Do Firms Insure Where Physical Risk Is Highest? Evidence from Natural Catastrophe Insurance in Italy

Albano, Donatella and Billio, Monica and De Bernardo, Gabriella and Gianni, Carlotta and Salvati, Luigi (2026): Do Firms Insure Where Physical Risk Is Highest? Evidence from Natural Catastrophe Insurance in Italy.

Abstract

This paper examines whether firms insure where objective physical risk is highest, in a context where physical climate risk is increasingly priced in capital markets, but insurance coverage remains limited. Using a unique firm-level data on natural catastrophe insurance in Italy matched with high-resolution geospatial indicators for earthquakes, floods, and landslides, we document a weak alignment between risk exposure and insurance uptake. Although higher seismic and hydraulic risk increase the probability of coverage, the economic magnitude of these effects is modest, and no significant relationship emerges for landslide risk. Firm characteristics—particularly size, sector, and legal form—play a substantially larger role than physical hazard exposure in explaining insurance demand. The results highlight a structural disconnect between risk exposure and risk transfer. Despite growing evidence that physical risk affects the cost of capital, insurance uptake remains only weakly responsive to differentiated hazard exposure, pointing to persistent demand- and supply-side frictions in catastrophe insurance markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Natural catastrophe insurance; Insurance demand; Physical risk exposure; Insurance protection gap; Firm-level data; Earthquakes; Floods; Landslides
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial Studies; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R19 - Other

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