2014 Annual Meeting

Session 1C: Catastrophic Risks I

Putting Everything under the Same Umbrella – Hazard-Specific Supply Reactions in the Aftermath of Natural Disasters

Prior studies on the impact of catastrophes on insurance markets have either focused on one specific type of hazard or pooled several natural disasters. In contrast, we analyze insurers’ hazard-specific supply reactions. We analyze U.S. property insurers’ supply decisions between 1991-2012 and find that insurers’ responses with respect to reduction of business volume and exit decisions differ across hazards, even after controlling for the damage size. The negative effects of catastrophes on underwriting performance and subsequent supply decisions are more pronounced for hurricanes than for the other hazards. We argue that supply distortions in the aftermath of unprecedented catastrophes are driven primarily by correlated losses. Our results show that the size and predictability of catastrophe losses pose less severe threats to insurers. Thus, we propose that first of all insurers and regulators should focus on measures that encourage diversification.

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Presented at: 2014 ARIA Annual Meeting

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