Catastrophic Losses and Insurer Profitability: Evidence from 9/11

Abstract

This paper examines two potential effects of the World Trade Center (WTC) attack on the insurance industry, a short-run negative claim effect and a long-run positive growth effect. We hypothesize a short-run claim effect, resulting from insufficient premium ex-ante for catastrophic losses, and a long-run growth effect, resulting from ex-post insurance supply reductions and potentially risk updating as well. We use short-run and long-run abnormal forecast revisions as measures of the claim and growth effects, analyzing both as functions of firm-specific characteristics. The empirical findings support our hypotheses. We find that firm type, estimates of firm losses, use of reinsurance, and the firm's tax position are statistically significant determinants of an insurer's short-run position. Firm type, estimates of firm losses, financial strength, underwriting risk, and use of reinsurance are statistically significant determinants of an insurer's long-run position.

Keywords: catastrophic losses, WTC attack, growth, claim, earnings forecast, insurance

JEL Classification: G22, G14