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The catastrophic effects of natural disasters on insurance markets

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  • Patricia Born
  • W. Viscusi

Abstract

Natural disasters often have catastrophic risks on insurance companies as well as on the insured. Using a very large dataset on homeowners’ insurance coverage by state, by firm, and by year for the 1984 to 2004 period, this paper documents the positive effect on losses and loss ratios of both unexpected catastrophes as well as large events that the authors term “blockbuster catastrophes.” Insurers adapt to these catastrophic risks by raising insurance rates, leading to lower loss ratios after the catastrophic event. There is a widespread event of unexpected catastrophes and blockbuster catastrophes that reduces total premiums earned in the state, reduces the total number writing insurance coverage in the state, and leads to the exit of firms from the state. Firms with low levels of homeowners’ premiums are most adversely affected by the catastrophes. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Patricia Born & W. Viscusi, 2006. "The catastrophic effects of natural disasters on insurance markets," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 55-72, September.
    • Handle: RePEc:kap:jrisku:v:33:y:2006:i:1:p:55-72
    DOI: 10.1007/s11166-006-0171-z
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    References listed on IDEAS

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    1. Richard Zeckhauser, 1995. "Insurance and catastrophes," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 20(2), pages 157-175, December.
    2. Born, Patricia H, 2001. "Insurer Profitability in Different Regulatory and Legal Environments," Journal of Regulatory Economics, Springer, vol. 19(3), pages 211-237, July.
    3. Martin F. Grace & Robert W. Klein & Paul R. Kleindorfer, 2004. "Homeowners Insurance With Bundled Catastrophe Coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(3), pages 351-379, September.
    4. Viscusi, W Kip, 1993. "The Risky Business of Insurance Pricing," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 117-139, August.
    5. Christian Gollier, 1997. "About the Insurability of Catastrophic Risks*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 22(2), pages 177-186, April.
    6. Patricia Born & William M. Gentry & W. Kip Viscusi & Richard J. Zeckhauser, 1998. "Organizational Form and Insurance Company Performance: Stocks versus Mutuals," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 167-192, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Catastrophic risks; Homeowners’ insurance; Natural disasters;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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