The Risk‐Sharing Implications of Disaster Insurance Funds

28 Pages Posted: 26 Feb 2013

See all articles by Alex Boulatov

Alex Boulatov

HSE Moscow; University of Houston - C.T. Bauer College of Business

Stephan Dieckmann

University of Pennsylvania - Finance Department

Date Written: March 2013

Abstract

We study the risk‐sharing implications that arise from introducing a disaster insurance fund to the cat insurance market. Such a form of intervention can increase efficiency in the private market, and our design of disaster insurance suggests a prominent role of catastrophe reinsurance. The model predicts buyers will increase their demand in the private market, and the seller will lower prices to such an extent that their revenues decrease upon introduction of disaster insurance. We test two predictions in the context of the Terrorism Risk Insurance Act (TRIA). It is already known that the introduction of TRIA led to negative abnormal returns in the insurance industry. In addition, we show this negative effect is stronger for larger and for low‐risk‐averse firms - two results that are consistent with our model. The seller’s risk aversion plays an important role in quantifying such feedback effects, and we point toward possible distortions in which a firm may even be overhedged upon introduction of disaster insurance.

Suggested Citation

Boulatov, Alex and Dieckmann, Stephan, The Risk‐Sharing Implications of Disaster Insurance Funds (March 2013). Journal of Risk and Insurance, Vol. 80, Issue 1, pp. 37-64, 2013. Available at SSRN: https://ssrn.com/abstract=2224493 or http://dx.doi.org/10.1111/j.1539-6975.2012.01466.x

Alex Boulatov (Contact Author)

HSE Moscow ( email )

26 Shabolovka
Moscow
Russia

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4618 (Phone)

Stephan Dieckmann

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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