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Corporate Management of Highly Dynamic Risks: The Case of Terrorism Insurance in Germany

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  • Thomann, Christian
  • Pascalau, Razvan
  • Schulenburg, J.-Matthias Graf von der
  • Gas, Bruno

Abstract

This article extends the theory of corporate risk management to encompass highly dynamic risks. Taking Viscusi'�s (1989) prospective reference from the context of individual decision making and applying it to a corporate context we propose a theory of how corporations process new information. Using unique data on all terrorism insurance policies sold in Germany we find support for this concept of risk-updating by showing that the demand for terrorism insurance is strongly determined by the recent occurrence of terrorist attacks.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7221.

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Date of creation: 13 Dec 2007
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Handle: RePEc:pra:mprapa:7221

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Keywords: Corporate Insurance; Risk Management; Terrorism Insurance; Expected Utility; Prospect Theory;

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  1. Viscusi, W Kip, 1989. " Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-63, September.
  2. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  3. Sunstein, Cass R, 2003. " Terrorism and Probability Neglect," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 121-36, March-May.
  4. Franz Fuerst, 2005. "Exogenous shocks and real estate rental markets: An event study of the 9/11 attacks and their impact on the New York office market," Finance 0509008, EconWPA.
  5. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
  6. Erwann Michel-Kerjan & Burkhard Pedell, 2005. "Terrorism Risk Coverage in the Post-9/11 Era: A Comparison of New Public–Private Partnerships in France, Germany and the U.S.*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 30(1), pages 144-170, January.
  7. Fischhoff, Baruch, et al, 2003. " Judged Terror Risk and Proximity to the World Trade Center," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 137-51, March-May.
  8. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  9. Jakus, Paul M & Shaw, W Douglass, 2003. " Perceived Hazard and Product Choice: An Application to Recreational Site Choice," Journal of Risk and Uncertainty, Springer, vol. 26(1), pages 77-92, January.
  10. Howard Kunreuther & Erwann Michel-Kerjan & Beverly Porter, 2003. "Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism," NBER Working Papers 10179, National Bureau of Economic Research, Inc.
  11. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
  12. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
  13. W. Kip Viscusi & Richard J. Zeckhauser, 2005. "Recollection Bias and the Combat of Terrorism," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 27-55, 01.
  14. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
  15. Viscusi, W Kip & O'Connor, Charles J, 1984. "Adaptive Responses to Chemical Labeling: Are Workers Bayesian Decision Makers?," American Economic Review, American Economic Association, vol. 74(5), pages 942-56, December.
  16. Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-96, April.
  17. Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages S225-50, October.
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