Corporate Demand for Insurance: New Evidence from the U.S. Terrorism and Property Markets

24 Pages Posted: 18 Oct 2013 Last revised: 14 Nov 2024

See all articles by Erwann Michel-Kerjan

Erwann Michel-Kerjan

University of Pennsylvania - The Wharton School - Center for Risk Management

Paul Raschky

Monash University - Department of Economics

Howard Kunreuther

National Bureau of Economic Research (NBER); University of Pennsylvania - Wharton Risk Management and Decision Processes Center

Date Written: October 2013

Abstract

Since the passage of the Terrorism Risk Insurance Act of 2002, corporate terrorism insurance is sold as a separate policy from commercial property coverage. In this paper, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique dataset of insurance policies purchased by large U.S. firms, combined with financial information of the corporate clients and of the insurance provider, we apply a two-stage least squares (2SLS) approach to obtain consistent estimates of premium elasticity of corporate demand for property and terrorism coverage. Our findings suggest that both are rather price inelastic and that corporate demand for terrorism insurance is significantly more price inelastic than demand for property insurance. We further find a negative relation between the solvency ratios of both property and terrorism risk coverage, with a stronger effect on the latter, indicating that companies use their ability to self-insure as a substitute for market insurance. Our results are robust to the application of alternative estimators as well as changes in the econometric specifications.

Suggested Citation

Michel-Kerjan, Erwann and Raschky, Paul and Kunreuther, Howard C. and Kunreuther, Howard C., Corporate Demand for Insurance: New Evidence from the U.S. Terrorism and Property Markets (October 2013). NBER Working Paper No. w19532, Available at SSRN: https://ssrn.com/abstract=2342012

Erwann Michel-Kerjan (Contact Author)

University of Pennsylvania - The Wharton School - Center for Risk Management ( email )

Jon M Huntsman Hall, Suite 500
3730 Walnut Street
Philadelphia, PA 19104-6365
United States

Paul Raschky

Monash University - Department of Economics ( email )

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Clayton, Victoria 3
Australia

Howard C. Kunreuther

National Bureau of Economic Research (NBER)

University of Pennsylvania - Wharton Risk Management and Decision Processes Center ( email )

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Philadelphia, PA 19104
United States
215-898-4589 (Phone)

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