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The Catastrophic Effects of Natural Disasters on Insurance Markets

  • W. Kip Viscusi
  • Patricia Born

Natural catastrophes often have catastrophic risks on insurance companies as well as on the insured. Using a very large dataset on homeowners%u2019 insurance coverage by state, by firm, and by year for the 1984 to 2004 period, this paper documents the positive effect on losses and loss ratios of both unexpected catastrophes as well as large events that the authors term %u201Cblockbuster catastrophes.%u201D Insurers adapt to these catastrophic risks by raising insurance rates, leading to lower loss ratios after the catastrophic event. There is a widespread event of unexpected catastrophes and blockbuster catastrophes that reduces total premiums earned in the state, reduces the total number writing insurance coverage in the state, and leads to the exit of firms from the state. Firms with low levels of homeowners%u2019 premiums are most adversely affected by the catastrophes.

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File URL: http://www.nber.org/papers/w12348.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12348.

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Date of creation: Jul 2006
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:12348
Note: HC LE
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  1. Patricia Born & William M. Gentry & W. Kip Viscusi & Richard J. Zeckhauser, 1995. "Organizational Form and Insurance Company Performance: Stocks versus Mutuals," NBER Working Papers 5246, National Bureau of Economic Research, Inc.
  2. Born, Patricia H, 2001. "Insurer Profitability in Different Regulatory and Legal Environments," Journal of Regulatory Economics, Springer, vol. 19(3), pages 211-37, July.
  3. Christian Gollier, 1997. "About the Insurability of Catastrophic Risks*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 22(2), pages 177-186, April.
  4. Martin F. Grace & Robert W. Klein & Paul R. Kleindorfer, 2004. "Homeowners Insurance With Bundled Catastrophe Coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(3), pages 351-379.
  5. Viscusi, W Kip, 1993. " The Risky Business of Insurance Pricing," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 117-39, August.
  6. Richard Zeckhauser, 1995. "Insurance and catastrophes," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 20(2), pages 157-175, December.
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