Corporate Management of Highly Dynamic Risks: Evidence from the Demand for Terrorism Insurance in Germany

Christian Thomann, Razvan Pascalau () and Johann Graf von der Schulenburg

The Geneva Risk and Insurance Review, 2012, vol. 37, issue 1, 57-82

Abstract: This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.

Date: 2012
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