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An Empirical Analysis of the Economic Impact of Federal Terrorism Reinsurance

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  • Jeffrey R. Brown
  • J. David Cummins
  • Christopher M. Lewis
  • Ran Wei

Abstract

This paper examines the role of the federal government in the market for terrorism reinsurance. We investigate the stock price response of affected industries to a sequence of thirteen events culminating in the enactment of the Terrorism Risk Insurance Act (TRIA) of 2002. In the industries most likely to be affected by TRIA banking, construction, insurance, real estate investment trusts, transportation, and public utilities the stock price effect was primarily negative. The Act was at best value-neutral for property-casualty insurers because it eliminated the option not to offer terrorism insurance. The negative response of the other industries may be attributable to the Act's impeding more efficient private market solutions, failing to address nuclear, chemical, and biological hazards, and reducing market expectations of federal assistance following future terrorist attacks.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10388.

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Date of creation: Mar 2004
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:10388

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  1. Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
  2. Jeffrey R. Brown & Randall S. Kroszner & Brian H. Jenn, 2002. "Federal Terrorism Risk Insurance," NBER Working Papers 9271, National Bureau of Economic Research, Inc.
  3. Cutler, David M, 1988. "Tax Reform and the Stock Market: An Asset Price Approach," American Economic Review, American Economic Association, vol. 78(5), pages 1107-17, December.
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  7. Kenneth A. Froot & Paul G. J. O'Connell, 1999. "The Pricing of U.S. Catastrophe Reinsurance," NBER Chapters, in: The Financing of Catastrophe Risk, pages 195-232 National Bureau of Economic Research, Inc.
  8. Doherty, Neil A & Lamm-Tennant, Joan & Starks, Laura T, 2003. " Insuring September 11th: Market Recovery and Transparency," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 179-99, March-May.
  9. R. Anton Braun & Richard M. Todd & Neil Wallace, 1998. "The role of damage-contingent contracts in allocating the risks of natural catastrophes," Working Papers 586, Federal Reserve Bank of Minneapolis.
  10. Joskow, Paul L & McLaughlin, Linda, 1991. " McCarran-Ferguson Act Reform: More Competition or More Regulation?," Journal of Risk and Uncertainty, Springer, vol. 4(4), pages 373-401, December.
  11. Christopher Lewis & Kevin C. Murdock, 1999. "Alternative Means of Redistributing Catastrophic Risk in a National Risk-Management System," NBER Chapters, in: The Financing of Catastrophe Risk, pages 51-92 National Bureau of Economic Research, Inc.
  12. 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.
  13. James, Christopher, 1983. "An analysis of intra-industry differences in the effect of regulation : The case of deposit rate ceilings," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 417-432, September.
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