Why Some Disaster Insurance Does not Exist

Yueyun Chen and Iskandar S. Hamwi
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Yueyun Chen: University of the West
Iskandar S. Hamwi: University of Southern Mississippi

Asia-Pacific Journal of Risk and Insurance, 2012, vol. 6, issue 1, pages 2

Abstract:

The failure of some disaster insurance market has been a very serious problem. This paper focuses on why disaster reinsurance fails and how that will affect the availability of primary disaster insurance. The insurer’s unexpected costs are added to the expected costs associated with the insured event to illustrate the necessary and sufficient conditions for the existence of disaster insurance and reinsurance. Particularly, investors’ negative response to an insurer’s huge, disaster-related liability exposures may lead to availability problem unless the insurer’s asset value losses in the financial market can be minimized. A large insurer may be more likely to withdraw from underwriting disaster insurance. Three different pricing schemes for disaster reinsurance contracts are investigated. The one which is based on the Option Pricing Theory is rejected because it leads to market failure.

Keywords: insurance; finance; disaster insurance; unexpected cost; options; asset value losses; fair price (search for similar items in EconPapers)
Date: 2012
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