IDEAS home Printed from https://ideas.repec.org/a/bpj/apjrin/v6y2012i1n2.html
   My bibliography  Save this article

Why Some Disaster Insurance Does not Exist

Author

Listed:
  • Chen Yueyun

    (University of the West)

  • Hamwi Iskandar S.

    (University of Southern Mississippi)

Abstract

The failure of some disaster insurance market has been a very serious problem. This paper focuses on why disaster reinsurance fails and how that will affect the availability of primary disaster insurance. The insurer’s unexpected costs are added to the expected costs associated with the insured event to illustrate the necessary and sufficient conditions for the existence of disaster insurance and reinsurance. Particularly, investors’ negative response to an insurer’s huge, disaster-related liability exposures may lead to availability problem unless the insurer’s asset value losses in the financial market can be minimized. A large insurer may be more likely to withdraw from underwriting disaster insurance. Three different pricing schemes for disaster reinsurance contracts are investigated. The one which is based on the Option Pricing Theory is rejected because it leads to market failure.

Suggested Citation

  • Chen Yueyun & Hamwi Iskandar S., 2012. "Why Some Disaster Insurance Does not Exist," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(1), pages 1-16, February.
    • Handle: RePEc:bpj:apjrin:v:6:y:2012:i:1:n:2
    DOI: 10.1515/2153-3792.1111
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/2153-3792.1111
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/2153-3792.1111?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Pierre Picard, 2008. "Natural Disaster Insurance and the Equity‐Efficiency Trade‐Off," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 17-38, March.
    2. Browne, Mark J & Hoyt, Robert E, 2000. "The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 291-306, May.
    3. Bum J. Kim & Harris Schlesinger, 2005. "Adverse Selection in an Insurance Market With Government‐Guaranteed Subsistence Levels," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(1), pages 61-75, March.
    4. Kenneth A. Froot, 1999. "The Evolving Market for Catastrophic Event Risk," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 2(3), pages 1-28, September.
    5. Froot, Kenneth A. & O'Connell, Paul G.J., 2008. "On the pricing of intermediated risks: Theory and application to catastrophe reinsurance," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 69-85, January.
    6. Xuanjuan Chen & Helen Doerpinghaus & Bing‐Xuan Lin & Tong Yu, 2008. "Catastrophic Losses and Insurer Profitability: Evidence From 9/11," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 39-62, March.
    7. Kenneth A. Froot, 1997. "The Limited Financing of Catastrophe Risk: An Overview," NBER Working Papers 6025, National Bureau of Economic Research, Inc.
    8. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-187, May.
    9. Hoerger, Thomas J & Sloan, Frank A & Hassan, Mahmud, 1990. "Loss Volatility, Bankruptcy, and the Demand for Reinsurance," Journal of Risk and Uncertainty, Springer, vol. 3(3), pages 221-245, September.
    10. Yueyun Chen & Iskandar Hamwi & Tim Hudson, 2001. "The effect of ceded reinsurance on solvency of primary insurers," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(1), pages 65-82, February.
    11. repec:reg:rpubli:437 is not listed on IDEAS
    12. Howard Kunreuther, 2006. "Reflections on U.S. Disaster Insurance Policy for the 21st Century," NBER Working Papers 12449, National Bureau of Economic Research, Inc.
    13. Doherty, Neil A & Garven, James R, 1986. "Price Regulation in Property-Liability Insurance: A Contingent-Claims Approach," Journal of Finance, American Finance Association, vol. 41(5), pages 1031-1050, December.
    14. Yueyun Chen & Iskandar Hamwi & Tim Hudson, 2003. "Capital asset pricing models with default risk: Theory and application in insurance," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 9(1), pages 20-34, February.
    15. Mayers, David & Smith, Clifford W, Jr, 1990. "On the Corporate Demand for Insurance: Evidence from the Reinsurance Market," The Journal of Business, University of Chicago Press, vol. 63(1), pages 19-40, January.
    16. Iskandar Hamwi & Tim Hudson & Yueyun Chen, 2004. "Solvency regulation in the property-liability insurance industry," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 10(4), pages 313-327, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Helmut Gründl & Danjela Guxha & Anastasia Kartasheva & Hato Schmeiser, 2021. "Insurability of pandemic risks," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(4), pages 863-902, December.
    2. Amanda Savitt, 2017. "Insurance as a tool for hazard risk management? An evaluation of the literature," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 86(2), pages 583-599, March.
    3. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris Nanterre, EconomiX.
    4. Surminski, Swenja & Eldridge, Jillian, 2015. "Flood insurance in England: an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," LSE Research Online Documents on Economics 66256, London School of Economics and Political Science, LSE Library.
    5. Sana Sheikh & Ali Murad Syed & Syed Sikander Ali Shah, 2018. "Corporate Reinsurance Utilisation and Capital Structure: Evidence from Pakistan Insurance Industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(2), pages 300-334, April.
    6. Shiu, Yung-Ming, 2020. "How does reinsurance and derivatives usage affect financial performance? Evidence from the UK non-life insurance industry," Economic Modelling, Elsevier, vol. 88(C), pages 376-385.
    7. Arnaud Goussebaïle, 2016. "Risk prevention in cities prone to natural hazards," Working Papers hal-01358734, HAL.
    8. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    9. Swenja Surminski & Jillian Eldridge, 2014. "Flood insurance in England � an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," GRI Working Papers 144, Grantham Research Institute on Climate Change and the Environment.
    10. Selim Mankai & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," Working Papers hal-04141190, HAL.
    11. Henri Loubergé, 1998. "Risk and Insurance Economics 25 Years After," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 23(4), pages 540-567, October.
    12. Chia-Ling Ho & Gene Lai & Sangyong Han & Licheng Jin, 2022. "Organisational structure, corporate governance and reinsurance decisions in the U.S. property-liability insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(4), pages 737-784, October.
    13. Upreti, Vineet & Adams, Mike, 2015. "The strategic role of reinsurance in the United Kingdom’s (UK) non-life insurance market," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 206-219.
    14. Howard Kunreuther & Erwann Michel-Kerjan, 2015. "Demand for fixed-price multi-year contracts: Experimental evidence from insurance decisions," Journal of Risk and Uncertainty, Springer, vol. 51(2), pages 171-194, October.
    15. Shi-jie Jiang & Feiyun Xiang & Iris Yang, 2023. "Effect of Prevention Focus on the Relationships Among Driving Accident History, Risk Perception, and Consumers’ Automobile Insurance Coverage Decisions," SAGE Open, , vol. 13(3), pages 21582440231, July.
    16. Gibson, Rajna & Habib, Michel A. & Ziegler, Alexandre, 2014. "Reinsurance or securitization: The case of natural catastrophe risk," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 79-100.
    17. Marielle Brunette & Stéphane Couture & Serge S. Garcia, 2011. "Determinants of insurance demand against forest fire risk: Evidence from experimental and real world data," Post-Print hal-01191123, HAL.
    18. Mark Browne & Christian Knoller & Andreas Richter, 2015. "Behavioral bias and the demand for bicycle and flood insurance," Journal of Risk and Uncertainty, Springer, vol. 50(2), pages 141-160, April.
    19. Erwann Michel-Kerjan, 2013. "Finance des risques catastrophiques. Le marché américain est en plein bouleversement," Revue économique, Presses de Sciences-Po, vol. 64(4), pages 615-634.
    20. Yueyun Chen & Iskandar Hamwi & Tim Hudson, 2003. "Capital asset pricing models with default risk: Theory and application in insurance," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 9(1), pages 20-34, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:apjrin:v:6:y:2012:i:1:n:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.