The Pricing of U.S. Catastrophe Reinsurance
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.
|Date of creation:||May 1997|
|Date of revision:|
|Publication status:||published as The Financing of Catastrophe Risk. Froot, Kenneth A., ed., Chicago: The University of Chicago Press, 1999, pp. 195-227.|
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- Kenneth A. Froot & Jeremy C. Stein, 1996.
"Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach,"
NBER Working Papers
5403, National Bureau of Economic Research, Inc.
- Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
- Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," Center for Financial Institutions Working Papers 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Anne Gron & Deborah Lucas, 1995.
"External Financing and Insurance Cycles,"
NBER Working Papers
5229, National Bureau of Economic Research, Inc.
- 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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