Does Insurance Help to Escape the Poverty Trap?–A Ruin Theoretic Approach

Poverty trapping refers to the fact that poor people in developing countries cannot escape their poverty without help from outside. This is worsened by extreme events, for example, floods or hurricanes, sending people to poverty who have not been poor before. Often, insurance is seen as a way out. This article studies poverty trapping in the context of catastrophic risk and introduces a ruin‐type model, combining deterministic growth with a stochastic loss model. We analyze the properties of the resulting piecewise deterministic Markov process, especially its trapping risk, and discuss for which groups of people insurance can reduce trapping probability.