The Impact of Mega-Catastrophes on Insurers: An Exposure-Based Analysis of the U.S. Homeowners’ Insurance Market

29 Pages Posted: 9 Sep 2012 Last revised: 16 Jul 2014

See all articles by Bjoern Hagendorff

Bjoern Hagendorff

Independent

Jens Hagendorff

University of Edinburgh - Business School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: June 4, 2014

Abstract

Insurance is a key risk sharing mechanism that protects citizens and governments from the losses caused by natural catastrophes. Given the increase in the frequency and intensity of natural catastrophes over recent years, this paper analyzes the performance effects of mega-catastrophes for U.S. insurance firms using a measure of market expectations. Specifically, we analyze the share price losses of insurance firms in response to catastrophe events to ascertain whether mega-catastrophes significantly damage the performance of insurers and whether different types of mega-catastrophes have different impacts. The main message from our analysis is that the impact of mega-catastrophes on insurers has not been too damaging. While the exact impact of catastrophes depends on the nature of the event and the degree of competition within the relevant insurance market (less competition allows insurers to recoup catastrophe losses through adjustments to premiums), our overall results suggest that U.S. insurance firms can adequately manage the risks and costs of mega-catastrophes. From a public policy perspective, our results show that insurance provides a robust means of sharing catastrophe losses to help reduce the financial consequences of a catastrophe event.

Keywords: G20, G22, G32

JEL Classification: Catastrophe risk, Homeowners’ insurance, Performance

Suggested Citation

Hagendorff, Bjoern and Hagendorff, Jens and Keasey, Kevin, The Impact of Mega-Catastrophes on Insurers: An Exposure-Based Analysis of the U.S. Homeowners’ Insurance Market (June 4, 2014). Available at SSRN: https://ssrn.com/abstract=2143196 or http://dx.doi.org/10.2139/ssrn.2143196

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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