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Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets

Author

Listed:
  • Erwann Michel-Kerjan
  • Paul Raschky
  • Howard Kunreuther

Abstract

type="main" xml:lang="en"> Since the passage of the Terrorism Risk Insurance Act of 2002, corporate terrorism insurance is sold as a separate policy from commercial property coverage. In this article, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique data set of insurance policies purchased by large U.S. firms, combined with financial information of the corporate clients and of the insurance provider, we apply a two-stage least squares approach to obtain consistent estimates of premium elasticity of corporate demand for property and terrorism coverage. Our findings suggest that both are rather price inelastic and that corporate demand for terrorism insurance is significantly more price inelastic than demand for property insurance. We further find a negative relation between the solvency ratios of both property and terrorism risk coverage, with a stronger effect on the latter, indicating that companies use their ability to self-insure as a substitute for market insurance. Our results are robust to the application of alternative estimators as well as changes in the econometric specifications.

Suggested Citation

  • Erwann Michel-Kerjan & Paul Raschky & Howard Kunreuther, 2015. "Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(3), pages 505-530, September.
    • Handle: RePEc:bla:jrinsu:v:82:y:2015:i:3:p:505-530
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    Cited by:

    1. Chen, Lu & Li, Bingqing & Zheng, Wenyuan, 2024. "Pure risk, agency conflict, and hedging," Journal of Banking & Finance, Elsevier, vol. 168(C).
    2. Adachi, Daisuke & Nakata, Hiroyuki & Sawada, Yasuyuki & Sekiguchi, Kunio, 2023. "Adverse selection and moral hazard in corporate insurance markets: Evidence from the 2011 Thailand floods," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 376-386.
    3. Joshua D. Woodard & Jing Yi, 2020. "Estimation of Insurance Deductible Demand Under Endogenous Premium Rates," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 477-500, June.
    4. O. Kuzmenko, M. Kascha, 2017. "Modeling the diagnostics of bankruptcy on Ukraine's insurance market based on harmonic analysis," Economy and Forecasting, Valeriy Heyets, issue 1, pages 146-157.
    5. Yugang Ding & Peiyun Deng, 2024. "Learning from natural disasters: Evidence from enterprise property insurance take-up in China," Journal of Risk and Uncertainty, Springer, vol. 68(3), pages 299-334, June.
    6. Woodard, Joshua, 2016. "Estimation of Insurance Deductible Demand under Endogenous Premium Rates," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236151, Agricultural and Applied Economics Association.
    7. Zeeshan Fareed & Najaf Iqbal & Shaoyong Zhang & Livia Madureira, 2025. "COVID‐19 and insurance industry: Initial impact of the pandemic based on time‐frequency methods," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 2240-2253, July.
    8. Erwann Michel‐Kerjan & Howard Kunreuther, 2018. "A Successful (Yet Somewhat Untested) Case of Disaster Financing: Terrorism Insurance Under TRIA, 2002–2020," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 21(1), pages 157-180, March.
    9. Alexander Braun & Marius Fischer, 2018. "Determinants of the Demand for Political Risk Insurance: Evidence from an International Survey," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(3), pages 397-419, July.
    10. Yutaro Izumi & Hiroyuki Nakata & Yasuyuki Sawada & Kunio Sekiguchi, 2024. "Building Business Resilience to Disasters," CIRJE F-Series CIRJE-F-1223, CIRJE, Faculty of Economics, University of Tokyo.
    11. Simone Krummaker, 2019. "Firm's demand for insurance: An explorative approach," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(3), pages 279-301, September.
    12. Paul Hudson & Annegret H. Thieken, 2022. "The presence of moral hazard regarding flood insurance and German private businesses," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 112(2), pages 1295-1319, June.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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