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Catastrophe insurance equilibrium with correlated claims

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  • Radoslav Raykov

Abstract

Catastrophe insurance differs from regular insurance in that individual claims are correlated and insurers have to pay more clients at once, which creates a liquidity strain. In this paper, I show two related findings: first, that when customers know their claims are correlated, this correlation can cause positive-sloping demand at low prices, and second, that because of this, a catastrophe insurance market can fail. Market failure is a stable equilibrium, which provides a better understanding of the frequent failures in catastrophe insurance markets. Copyright UK Crown:Bank of Canada 2015

Suggested Citation

  • Radoslav Raykov, 2015. "Catastrophe insurance equilibrium with correlated claims," Theory and Decision, Springer, vol. 78(1), pages 89-115, January.
    • Handle: RePEc:kap:theord:v:78:y:2015:i:1:p:89-115
    DOI: 10.1007/s11238-013-9403-2
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    References listed on IDEAS

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    1. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 529-571, May.
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    Cited by:

    1. Menna Hassan & Nourhan Sakr & Arthur Charpentier, 2022. "Government Intervention in Catastrophe Insurance Markets: A Reinforcement Learning Approach," Papers 2207.01010, arXiv.org.
    2. Radoslav Raykov & Consuelo Silva-Buston, 2018. "Multibank Holding Companies and Bank Stability," Staff Working Papers 18-51, Bank of Canada.
    3. Yuanzhong Li & Xinbang Cao & Shaojian Qu & Ying Ji & Zilong Xia, 2022. "Cost Sharing in Insurance Communities: A Hybrid Approach Based on Multiple-Choice Objective Programming and Cooperative Games," Sustainability, MDPI, vol. 14(24), pages 1-18, December.
    4. Radoslav Raykov, 2014. "Uncertain Costs and Vertical Differentiation in an Insurance Duopoly," Staff Working Papers 14-14, Bank of Canada.
    5. Xiaolan Wang & Xinli Wang & Jundi Liu & Jing Wang, 2024. "Strategic interactions and market equilibrium in China's agricultural catastrophic insurance," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 70(10), pages 495-512.
    6. Vijay Aseervatham & Patricia Born & Dominik Lohmaier & Andreas Richter, 2017. "Hazard-Specific Supply Reactions in the Aftermath of Natural Disasters," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(2), pages 193-225, April.
    7. repec:caa:jnlage:v:preprint:id:358-2023-agricecon is not listed on IDEAS

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