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
Date Written: June 4, 2014
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
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