Introduction

  • Martin F. Grace
  • Robert W. Klein
  • Paul R. Kleindorfer
  • Michael R. Murray
Part of the Topics in Regulatory Economics and Policy book series (TREP, volume 45)

Abstract

The risk of large losses from natural disasters in the U.S. has significantly increased in recent years, straining private insurance markets and creating troublesome problems for disaster-prone areas. The threat of mega-catastrophes resulting from intense hurricanes or earthquakes striking major population centers has dramatically altered the insurance environment. Estimates of probable maximum losses (PMLs) to insurers from a mega- catastrophe striking the U.S. range up to $100 billion depending on the location and intensity of the event (Applied Insurance Research, 2001).1 A severe disaster could have a significant financial impact on the industry (Cummins, Doherty, and Lo, 2002; Insurance Services Office, 1996a). Estimates of industry gross losses from the terrorist attack on September 11, 2001 range from $30 billion to $50 billion, and the attack’s effect on insurance markets underscores the need to understand the dynamics of the supply of and the demand for insurance against extreme events, including natural disasters.

Keywords

Insurance Coverage Income Expense 

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Notes

  1. 1.
    These probable maximum loss (PML) estimates are based on a 500-year “return” period. In other words, the probability that a loss would occur in any given year that would exceed the PML is one in 500. See Appendix B for an explanation of how such PML estimates can be calculated for a given insurer’s portfolio using catastrophe models.Google Scholar
  2. 2.
    For example, rates in the highest-risk coastal areas exposed to hurricanes still appear to be constrained by regulation.Google Scholar
  3. 3.
    There have been a number of recent accounts in Florida newspapers concerning disagreements between insurers and regulators on property insurance rates. Also, the number of full-coverage policies insured through the reformed Florida residual market mechanism, the Citizen’s Property Insurance Corporation, has grown from a low of residential 59,628 policies in April 2000 to 206, 256 policies as of year-end 2002, according to its latest Polices and Exposures Report (www.citizensfla.com).Google Scholar
  4. 4.
    The Insurance Services Office (ISO) provided these data to the authors on a confidential basis. The insurers included in this database granted explicit permission for the authors to use these data on a confidential basis.Google Scholar
  5. 5.
    Bundling refers to the combining of insurance against various perils for a range of coverages in a single insurance policy. Perils are causes of loss (e.g., fire, windstorm, earthquake, etc.). Coverage refers to the types of loss for which there is insurance (e.g., damage to structures, damage to contents, additional living expense, etc.).Google Scholar
  6. 6.
    More recently, the severe losses caused by the terrorist attacks on September 11, 2001 have placed increased pressure on both insurers and reinsurers across the country to increase prices for all catastrophe coverage.Google Scholar

Copyright information

© Springer Science+Business Media 2003

Authors and Affiliations

  • Martin F. Grace
    • 1
  • Robert W. Klein
    • 1
  • Paul R. Kleindorfer
    • 2
  • Michael R. Murray
    • 3
  1. 1.Georgia State UniversityAtlantaGeorgia
  2. 2.University of PennsylvaniaPhiladelphiaUSA
  3. 3.Insurance Services Office, Inc.Jersey CityUSA

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