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Hazard-Specific Supply Reactions in the Aftermath of Natural Disasters

Vijay Aseervatham (), Patricia Born (), Dominik Lohmaier () and Andreas Richter ()
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Vijay Aseervatham: Ludwig-Maximilians-Universität Munich
Patricia Born: Florida State University
Dominik Lohmaier: Ludwig-Maximilians-Universität Munich
Andreas Richter: Ludwig-Maximilians-Universität Munich

The Geneva Papers on Risk and Insurance - Issues and Practice, 2017, vol. 42, issue 2, 193-225

Abstract: Abstract 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.

Keywords: catastrophic risks; insurance supply; property/casualty insurance (search for similar items in EconPapers)
JEL-codes: D8 G22 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:pal:gpprii:v:42:y:2017:i:2:d:10.1057_s41288-016-0004-5