Hazard-Specific Supply Reactions in the Aftermath of Natural Disasters
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Prior studies on the effects of catastrophes on insurance markets have either focused on one specific type of hazard or pooled several natural disasters. We argue that insurers evaluate disaster risk with respect to not only the frequency and severity of disasters but also the disaster type. We analyse U.S. property insurers’ supply decisions between 1992 and 2012 and find that insurers’ responses with respect to the reduction of business volume and exit decisions differ across hazards, even after controlling for damage size. The negative effects of catastrophes on supply decisions are more pronounced after extreme hurricane years compared with tornado years. We argue that supply distortions in the aftermath of unprecedented catastrophes are driven primarily by correlated losses besides the damage size of the event. Our results show that the predictability of catastrophe losses poses less-severe threats to insurers. Thus, we propose that insurers and regulators should focus primarily on measures that encourage diversification.
Keywordscatastrophic risks insurance supply property/casualty insurance
JEL ClassificationD8 G22
The authors thank the participants at the Annual Meeting of the German Insurance Science Association, 2014; the Annual Meeting of the American Risk and Insurance Association, 2014; the CEAR/MRIC Behavioral Insurance Workshop, 2014; the 16th Joint Seminar of the European Association of Law and Economics (EALE) and The Geneva Association, 2015; and in particular, James Carson, Randy Dumm, Michael Hanselmann, Robert Hoyt, Johannes Jaspersen, Stefan Neuß and Martin Spindler for valuable comments. Any remaining errors are our own.
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