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

26 Pages Posted: 28 Aug 2015

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

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

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 article, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique data set 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 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., Corporate Demand for Insurance: New Evidence from the U.S. Terrorism and Property Markets (September 2015). Journal of Risk and Insurance, Vol. 82, Issue 3, pp. 505-530, 2015. Available at SSRN: https://ssrn.com/abstract=2652490 or http://dx.doi.org/10.1111/jori.12031

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 )

Wellington Road
Clayton, Victoria 3
Australia

Howard C. Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
558 & 559 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States
212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

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