A re-examination of the U.S. Insurance Market’s Capacity to Pay Catastrophe Losses

63 Pages Posted: 20 May 2022

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Denise Desjardins

University of Montreal - Center for Research on Transportation

Date Written: May 11, 2022

Abstract

Cummins, Doherty, and Lo (2002) present a theoretical and empirical analysis of the capacity of the property liability insurance industry in the U.S. to finance catastrophic losses. In their theoretical analysis, they show that a sufficient condition for capacity maximization is for all insurers to hold a net of reinsurance underwriting portfolio that is perfectly correlated with aggregate industry losses. Estimating capacity from insurers’ financial statement data, they find that the U.S. insurance industry could adequately fund a $100 billion event in 1997. As a matter of comparison, Hurricane Katrina in 2005 cost the insurance industry $40 to $55 billion (2005 dollars). Our main objective is to update the study of Cummins et al (2002) with new data available up to the end of 2020. We verify how the insurance market’s capacity has evolved over recent years. We show that the U.S. insurance industry’s capacity to pay catastrophe losses is higher in 2020 than it was in 1997. Insurers could pay 98% of a $200 billion loss in 2020 in comparison to 81% in 1997.

Keywords: Catastrophe loss, U.S. insurance industry, industry capacity, reinsurance, climate finance, climate risk.

JEL Classification: G22, G52, Q54, Q57, D81, D53.

Suggested Citation

Dionne, Georges and Desjardins, Denise, A re-examination of the U.S. Insurance Market’s Capacity to Pay Catastrophe Losses (May 11, 2022). Available at SSRN: https://ssrn.com/abstract=4113490 or http://dx.doi.org/10.2139/ssrn.4113490

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Denise Desjardins

University of Montreal - Center for Research on Transportation ( email )

C.P. 6128, Succ. Centre-Ville
Montreal, Quebec H3C 3J7
Canada

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