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A re-examination of the U.S. insurance market’s capacity to pay catastrophe losses

Georges Dionne () and Denise Desjardins ()
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Denise Desjardins: HEC Montreal, Canada Research Chair in Risk Management

No 22-2, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: Cummins, Doherty, and Lo (2002) present a theoretical and empirical analysis of the capacity of the property liability insurance industry in the U.S. to finance catastrophic losses. In their theoretical analysis, they show that a sufficient condition for capacity maximization is for all insurers to hold a net of reinsurance underwriting portfolio that is perfectly correlated with aggregate industry losses. Estimating capacity from insurers’ financial statement data, they find that the U.S. insurance industry could adequately fund a $100 billion event in 1997. As a matter of comparison, Hurricane Katrina in 2005 cost the insurance industry $40 to $55 billion (2005 dollars). Our main objective is to update the study of Cummins et al (2002) with new data available up to the end of 2020. We verify how the insurance market’s capacity has evolved over recent years. We show that the U.S. insurance industry’s capacity to pay catastrophe losses is higher in 2020 than it was in 1997. Insurers could pay 98% of a $200 billion loss in 2020 in comparison to 81% in 1997.

Keywords: Catastrophe loss; US insurance industry; industry capacity; reinsurance; climate finance; climate risk (search for similar items in EconPapers)
JEL-codes: D53 D81 G22 G52 Q54 Q57 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2022-05-11
New Economics Papers: this item is included in nep-ias and nep-rmg
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