The Pricing of U.S. Catastrophe Reinsurance
In: The Financing of Catastrophe Risk
We explore two theories that have been advanced to explain the patterns in U.S. catastrophe reinsurance pricing. The first is that price variation is tied to demand shocks, driven in effect by changes in actuarially expected losses. The second holds that the supply of capital to the reinsurance industry is less than perfectly elastic, with the consequence that prices are bid up whenever existing funds are depleted by catastrophe losses. Using detailed reinsurance contract data from Guy Carpenter & Co. over a 25-year period, we test these two theories. Our results suggest that capital market imperfections are more important than shifts in actuarial valuation for understanding catastrophe reinsurance pricing. Supply, rather than demand, shifts seem to explain most features of the market in the aftermath of a loss.
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- Anne Gron & Deborah J. Lucas, 1998.
"External Financing and Insurance Cycles,"
in: The Economics of Property-Casualty Insurance, pages 5-28
National Bureau of Economic Research, Inc.
- Kenneth A. Froot & Jeremy C. Stein, 1996.
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Center for Financial Institutions Working Papers
96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
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- Anne Gron, 1994. "Capacity Constraints and Cycles in Property-Casualty Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 110-127, Spring.
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