The catastrophic effects of natural disasters on insurance markets

Viscusi, W. Kip; Born, Patricia

doi:10.1007/s11166-006-0171-z

Cited by 79 publications

(48 citation statements)

References 8 publications

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“…In some markets, extremely slow capital movement leads to price reversals that continue over many months. For example, Froot and O'Connell (1999), Zanjani (2002), and Born and Viscusi (2006) explain how premiums for catastrophe risk insurance typically increase dramatically when insurance and re‐insurance firms suffer significant damage claims after natural disasters such as Hurricane Andrews in 1992. Premiums then drop toward “soft‐market” levels over many months (absent other shocks to the capital of insurers) because the replacement of insurance capital is delayed by institutional barriers to capital raising, including the time spent searching for suitable new investors.…”

Section: Motivating Example 3: Catastrophe Risk Premium Dynamicsmentioning

confidence: 99%

Presidential Address: Asset Price Dynamics with Slow‐Moving Capital

Duffie

2010

The Journal of Finance

725

318

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I describe asset price dynamics caused by the slow movement of investment capital to trading opportunities. The pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade, such as search costs for trading counterparties or time to raise capital by intermediaries. I discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions, which subsided afterward. After presenting examples of price reactions to supply shocks in normal market settings, I offer a simple illustrative model of price dynamics associated with slow-moving capital due to the presence of inattentive investors.I ADDRESS THE IMPLICATIONS for asset price dynamics of the apparent slow movement of investment capital to trading opportunities. The arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets, for example an electronic limit-order-book market for equities, or by months in other markets, such as that for catastrophe risk insurance. Accordingly, prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital (and thus risk-bearing capacity) that is immediately available to absorb a shock on short notice. Such a price impact is substantially reversed over time as additional capital becomes available. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement, such as search costs for trading * Darrell

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Section: Motivating Example 3: Catastrophe Risk Premium Dynamicsmentioning

confidence: 99%

Presidential Address: Asset Price Dynamics with Slow‐Moving Capital

Duffie

2010

The Journal of Finance

725

318

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“…This relies on the assumption that markets are imperfect and the supply of capital to insurers adjusts slowly in the short run, particularly after an industry-wide loss shock. The capacity-constraint theory argument is that underwriting cycles are the result of frictions caused by a temporary incapacity of the industry to insure all risks (Gron, 1994a, b;Winter, 1994), or the impact of a major catastrophe (Cummins, 2006;Born and Viscusi, 2006) which depletes part of the capital in the reinsurance market (Berger et al, 1992;Meier and Outreville, 2006). As insured risks are not independent, premium nonlinearity results from the dependence between losses.…”

Section: Insurance Cyclesmentioning

confidence: 99%

Underwriting Apophenia and Cryptids: Are Cycles Statistical Figments of our Imagination?

Boyer

Owadally

2014

Geneva Pap Risk Insur Issues Pract

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The Lloyd's 2007 Survey of Underwriters states that "for the third year running, managing the cycle emerged as the most important challenge for the industry, by some margin". The premise is, of course, that underwriting cycles exist in property and casualty insurance, and are economically significant. Using a meta-analysis of published papers in the area of insurance economics, we show that the evidence supporting the existence of underwriting cycles is misleading. There is, in fact, little evidence in favour of insurance cycles with a linear autoregressive character. This means that any cyclicality in firm profitability in the property and casualty insurance industry is not predictable in a classical econometric framework. It follows that pricing in the property and casualty insurance industry is not incompatible with that of a competitive market.JEL Classification: G22.

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“…However, the impact of climate change on wind extremes has not received similar attention even though they have effects on energy sectors Barthelmie 2010, 2013), design and safety of buildings and bridges (ASCE 7-05: Minimum Design Loads for Building and Structures), insurance industry (Born and Viscusi 2006), and coastal ecosystems (Iles et al 2012). In the last decade, economic and insured losses due to extreme winds have increased unprecedentedly (Coumou and Rahmstorf 2012).…”

Section: Introductionmentioning

confidence: 99%