Costly Risk Bearing and the Supply of Catastrophic Insurance

JOURNAL OF RISK AND INSURANCE, Vol. 63, No. 4, December 1996

Posted: 5 Feb 1997

See all articles by Anne E. Kleffner

Anne E. Kleffner

University of Calgary - Haskayne School of Business

Neil A. Doherty

University of Pennsylvania - Insurance & Risk Management Department; University of Pennsylvania - Business & Public Policy Department

Abstract

Efficient contracts for sharing risk will allocate risk according to comparative advantage. This article considers insurance markets for earthquake risk and how comparative advantage in risk bearing can explain the amount of business individual insurers write. The respective abilities of insurers to write this risk depend on the characteristics of their entire portfolio as well as on financial features that influence the costs of risk bearing. Several recent contributions have shown why risk is costly to corporations such as insurers. The costs of risk arise from tax convexity, principal agent relationships within the firm, and the costs of financial distress. We will show how these types of features jointly determine the capacity of insurers to write earthquake insurance. We derive and estimate a cross-sectional model of earthquake insurance, and the results support the hypothesis that firms with a higher imputed cost of risk bearing assume less earthquake risk.

JEL Classification: G22, D81, D82

Suggested Citation

Kleffner, Anne E. and Doherty, Neil A., Costly Risk Bearing and the Supply of Catastrophic Insurance. JOURNAL OF RISK AND INSURANCE, Vol. 63, No. 4, December 1996. Available at SSRN: https://ssrn.com/abstract=3699

Anne E. Kleffner

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-8596 (Phone)
403-284-7903 (Fax)

Neil A. Doherty (Contact Author)

University of Pennsylvania - Insurance & Risk Management Department ( email )

Philadelphia, PA 19104-6365
United States
215-898-7652 (Phone)
215-898-0310 (Fax)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

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