Market Expectations following Major Catastrophes: An Examination of Insurance Broker Returns

Journal of Risk and Insurance, Forthcoming

28 Pages Posted: 3 Mar 2013 Last revised: 11 Jul 2015

See all articles by Marc A. Ragin

Marc A. Ragin

University of Georgia; University of Georgia - Department of Insurance, Legal Studies, Real Estate

Martin Halek

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: 2015

Abstract

We investigate the effect major catastrophes are expected to have on equilibrium price and quantity in the insurance market. In particular, we examine whether investors expect total industry revenue to increase following a disaster's shock to insurers' financial capital. Rather than examine insurers directly, we study insurance brokers, who earn commissions on premium revenue but do not pay losses following a disaster. We conduct an event study on insurance broker stock returns surrounding the 43 largest insured-loss catastrophes since 1970. We find that brokers earn positive abnormal returns on the day of the event, and that these returns are sustained following the top 20 largest events. We then investigate factors influencing these returns and find that returns are positively related to the size of the loss and negatively related to existing insurer capital. From this, we conclude that catastrophe shocks are expected to increase net industry revenue, benefiting brokers most immediately. This investor response is consistent with economic theories of a negative relationship between capital and insurance prices and price-inelastic demand for commercial insurance.

Keywords: Catastrophe, Insurance, Insurance Demand, Insurance Intermediary, Event Study

JEL Classification: E32, G22, G14

Suggested Citation

Ragin, Marc A. and Ragin, Marc A. and Halek, Martin, Market Expectations following Major Catastrophes: An Examination of Insurance Broker Returns (2015). Journal of Risk and Insurance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2227032 or http://dx.doi.org/10.2139/ssrn.2227032

Marc A. Ragin (Contact Author)

University of Georgia ( email )

610 S Lumpkin Street
Moore-Rooker A417
Athens, GA 30602-6254
United States
7067132775 (Phone)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

610 S Lumpkin Street
Moore-Rooker A417
Athens, GA 30602-6254
United States
7067132775 (Phone)

Martin Halek

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States

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