IDEAS home Printed from https://ideas.repec.org/a/kap/theord/v78y2015i1p89-115.html
   My bibliography  Save this article

Catastrophe insurance equilibrium with correlated claims

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11238-013-9403-2
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11238-013-9403-2?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. Cummins, J David & Mahul, Olivier, 2003. "Optimal Insurance with Divergent Beliefs about Insurer Total Default Risk," Journal of Risk and Uncertainty, Springer, vol. 27(2), pages 121-138, October.
    2. Kenneth A. Froot, 1999. "Introduction to "The Financing of Catastrophe Risk"," NBER Chapters, in: The Financing of Catastrophe Risk, pages 1-22, National Bureau of Economic Research, Inc.
    3. Blanchard, Olivier Jean & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 1994. "What do firms do with cash windfalls?," Journal of Financial Economics, Elsevier, vol. 36(3), pages 337-360, December.
    4. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, March.
    5. Froot, Kenneth A. (ed.), 1999. "The Financing of Catastrophe Risk," National Bureau of Economic Research Books, University of Chicago Press, number 9780226266237, December.
    6. John David Cummins & Olivier Mahul, 2003. "Optimal insurance with divergent beliefs about total default risk," Post-Print hal-01952121, HAL.
    7. Geoffrey Heal & Howard Kunreuther, 2004. "Interdependent Security: A General Model," NBER Working Papers 10706, National Bureau of Economic Research, Inc.
    8. J. David Cummins, 2006. "Should the government provide insurance for catastrophes?," Review, Federal Reserve Bank of St. Louis, vol. 88(Jul), pages 337-380.
    9. Kunreuther, Howard & Heal, Geoffrey, 2003. "Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-249, March-May.
    10. Rustam Ibragimov & Dwight Jaffee & Johan Walden, 2009. "Nondiversification Traps in Catastrophe Insurance Markets," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 959-993.
    11. 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.
    12. Howard Kunreuther & Geoffrey Heal, 2012. "Managing Catastrophic Risk," NBER Working Papers 18136, National Bureau of Economic Research, Inc.
    13. Mattias K. Polborn, 1998. "A Model of an Oligopoly in an Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 23(1), pages 41-48, June.
    14. Cummins, J. David & Danzon, Patricia M., 1997. "Price, Financial Quality, and Capital Flows in Insurance Markets," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 3-38, January.
    15. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    16. 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.
    17. Bertrand Venard & David Cummins, 2007. "Handbook of international insurance. Between global dynamics and local contingencies," Post-Print hal-00778917, HAL.
    18. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    19. Rustam Ibragimov & Dwight Jaffee & Johan Walden, 2009. "Nondiversification Traps in Catastrophe Insurance Markets," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 959-993, March.
    20. repec:aei:rpbook:53308 is not listed on IDEAS
    21. Paul Kleindorfer & Howard Kunreuther, 1999. "Challenges Facing the Insurance Industry in Managing Catastrophic Risks," NBER Chapters, in: The Financing of Catastrophe Risk, pages 149-194, National Bureau of Economic Research, Inc.
    22. Hoy, Michael & Robson, Arthur J., 1981. "Insurance as a Giffen good," Economics Letters, Elsevier, vol. 8(1), pages 47-51.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Radoslav Raykov & Consuelo Silva-Buston, 2018. "Multibank Holding Companies and Bank Stability," Staff Working Papers 18-51, Bank of Canada.
    3. Radoslav Raykov, 2014. "Uncertain Costs and Vertical Differentiation in an Insurance Duopoly," Staff Working Papers 14-14, Bank of Canada.
    4. 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.
    5. Menna Hassan & Nourhan Sakr & Arthur Charpentier, 2022. "Government Intervention in Catastrophe Insurance Markets: A Reinforcement Learning Approach," Papers 2207.01010, arXiv.org.

    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. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    2. Torben Andersen, 2001. "Managing Economic Exposures of Natural Disasters: Exploring Alternative Financial Risk Management Opportunities and Instruments," IDB Publications (Working Papers) 8934, Inter-American Development Bank.
    3. 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.
    4. Michel-Kerjan Erwann & de Marcellis-Warin Nathalie, 2006. "Public-Private Programs for Covering Extreme Events: The Impact of Information Distribution on Risk-Sharing," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 1(2), pages 1-30, February.
    5. Harrington, Scott E. & Niehaus, Greg, 2003. "Capital, corporate income taxes, and catastrophe insurance," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 365-389, October.
    6. Kenneth A. Froot, 2007. "Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 273-299, June.
    7. Nell, Martin & Richter, Andreas, 2002. "Improving risk allocation through cat bonds," Working Papers on Risk and Insurance 10, University of Hamburg, Institute for Risk and Insurance.
    8. Radoslav Raykov, 2014. "Uncertain Costs and Vertical Differentiation in an Insurance Duopoly," Staff Working Papers 14-14, Bank of Canada.
    9. Steven Shavell, 2014. "A general rationale for a governmental role in the relief of large risks," Journal of Risk and Uncertainty, Springer, vol. 49(3), pages 213-234, December.
    10. Silke Finken & Christian Laux, 2009. "Catastrophe Bonds and Reinsurance: The Competitive Effect of Information‐Insensitive Triggers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 579-605, September.
    11. Steven Shavell, 2014. "A General Rationale for a Governmental Role in the Relief of Large Risks," NBER Working Papers 20192, National Bureau of Economic Research, Inc.
    12. Brown, Jeffrey R. & Cummins, J. David & Lewis, Christopher M. & Wei, Ran, 2004. "An empirical analysis of the economic impact of federal terrorism reinsurance," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 861-898, July.
    13. 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.
    14. 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.
    15. Ralph S. J. Koijen & Motohiro Yogo, 2015. "The Cost of Financial Frictions for Life Insurers," American Economic Review, American Economic Association, vol. 105(1), pages 445-475, January.
    16. Darrell Duffie & Bruno Strulovici, 2012. "Capital Mobility and Asset Pricing," Econometrica, Econometric Society, vol. 80(6), pages 2469-2509, November.
    17. Prof. Dr. Walter Krämer & Sebastian Schich, "undated". "Large - scaledisasters and the insurance industry," Working Papers 4, Business and Social Statistics Department, Technische Universität Dortmund, revised Mar 2005.
    18. Nathalie de Marcelis-Warin & Erwann Michel-Kerjan, 2003. "Catastrophe risk sharing and public-private partnerships : From natural disasters to terrorism," Working Papers hal-00242981, HAL.
    19. Massimo Mariani & Paola Amoruso, 2016. "The Effectiveness of Catastrophe Bonds in Portfolio Diversification," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1760-1767.
    20. Erwann O. Michel-Kerjan, 2010. "Catastrophe Economics: The National Flood Insurance Program," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 165-186, Fall.

    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:kap:theord:v:78:y:2015:i:1:p:89-115. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.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.