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.

    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. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, January.
    8. 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.
    9. 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.
    10. J. David Cummins, 2006. "Should the government provide insurance for catastrophes?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 337-380.
    11. Kunreuther, Howard & Heal, Geoffrey, 2003. "Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-249, March-May.
    12. repec:aei:rpbook:53308 is not listed on IDEAS
    13. 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.
    14. 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. repec:pal:gpprii:v:42:y:2017:i:2:d:10.1057_s41288-016-0004-5 is not listed on IDEAS
    2. Radoslav S. Raykov, 2014. "Uncertain Costs and Vertical Differentiation in an Insurance Duopoly," Staff Working Papers 14-14, Bank of Canada.

    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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    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 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.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.