The Pricing of U.S. Catastrophe Reinsurance

Kenneth Froot and Paul G. J. O'Connell

No 6043, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore two theories that have been advanced to explain the patterns in U.S. catastrophe reinsurance pricing. The first is that price variation is tied to demand shocks, driven in effect by changes in actuarially expected losses. The second holds that the supply of capital to the reinsurance industry is less than perfectly elastic, with the consequence that prices are bid up whenever existing funds are depleted by catastrophe losses. Using detailed reinsurance contract data from Guy Carpenter & Co. over a 25-year period, we test these two theories. Our results suggest that capital market imperfections are more important than shifts in actuarial valuation for understanding catastrophe reinsurance pricing. Supply, rather than demand, shifts seem to explain most features of the market in the aftermath of a loss.

JEL-codes: F (search for similar items in EconPapers)
Date: 1997-05
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as The Financing of Catastrophe Risk. Froot, Kenneth A., ed., Chicago: The University of Chicago Press, 1999, pp. 195-227.
Published as The Pricing of U.S. Catastrophe Reinsurance , Kenneth A. Froot, Paul G. J. O'Connell. in The Financing of Catastrophe Risk , Froot. 1999

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Chapter: The Pricing of U.S. Catastrophe Reinsurance (1999)
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