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Catastrophe insurance equilibrium with correlated claims

Listed author(s):
  • Radoslav Raykov

    ()

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

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File URL: http://hdl.handle.net/10.1007/s11238-013-9403-2
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Article provided by Springer in its journal Theory and Decision.

Volume (Year): 78 (2015)
Issue (Month): 1 (January)
Pages: 89-115

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Handle: RePEc:kap:theord:v:78:y:2015:i:1:p:89-115
DOI: 10.1007/s11238-013-9403-2
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Order Information: Web: http://www.springer.com/economics/economic+theory/journal/11238/PS2

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  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, December.
  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.
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