The market for catastrophe risk: a clinical examination
AbstractThis paper examines the market for catastrophe event risk i.e., financial claims that are linked to losses associated with natural hazards, such as hurricanes and earthquakes. Risk management theory suggests protection by insurers and other corporations against the largest cat events is most valuable. We show, however, that historically most insurers have purchased relatively little cat reinsurance against large events. We also find that premiums are high relative to expected losses, especially after cat events. We then examine clinical evidence to understand why the theory fails. Specifically, we examine transactions that look to capital markets, rather than traditional reinsurance markets, for risk-bearing capacity. These provide hints as to why the theory fails. We explore these hints in eight theoretical explanations and find the most compelling to be supply restrictions associated with capital market imperfections and market power exerted by traditional reinsurers.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 60 (2001)
Issue (Month): 2-3 (May)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505576
Other versions of this item:
- Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
- Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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