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Theory and Decision

, Volume 78, Issue 1, pp 89–115 | Cite as

Catastrophe insurance equilibrium with correlated claims

  • Radoslav S. RaykovEmail author
Article

Abstract

Catastrophe insurance differs from regular insurance in that individual claims are correlated and insurers have to pay more clients at once, which creates a liquidity strain. In this paper, I show two related findings: first, that when customers know their claims are correlated, this correlation can cause positive-sloping demand at low prices, and second, that because of this, a catastrophe insurance market can fail. Market failure is a stable equilibrium, which provides a better understanding of the frequent failures in catastrophe insurance markets.

Keywords

Insurance Catastrophic risks Default risk Catastrophes 

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Copyright information

© UK Crown:Bank of Canada 2014

Authors and Affiliations

  1. 1.Financial Stability DepartmentBank of CanadaOttawaCanada

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