Catastrophic Events, Parameter Uncertainty and the Breakdown of Implicit Long-Term Contracting: The Case of Terrorism Insurance
Abstract
This paper examines the reaction of the stock prices of U.S. property-casualty insurers to the World Trade Center (WTC) terrorist attack of September 11, 2001. Theories of insurance market equilibrium and theories of long-term contracting predict that large loss events which deplete capital and increase parameter uncertainty will affect weakly capitalized insurers more significantly than stronger firms. The empirical results are consistent with this prediction. Insurance stock prices generally declined following the WTC attack. However, the stock prices of insurers with strong financial ratings rebounded after the first post-event week, while those of weaker insurers did not, consistent with the flight-to-quality hypothesis.
Large-Scale Disasters and the Insurance Industry
Abstract:
We investigate the impact of the 20 largest – in terms of insured losses – man-made or natural disasters on various insurance industry stock indices. We show via an event study that insurance sectors worldwide are quite resilient, in a market-value sense, to unexpected losses to capital: our data provide evidence that equity market investors believe that insurance companies will on average be able to make losses back over the foreseeable future, i.e. that the adverse shocks to equity which have resulted from these catastrophes will be compensated by either an outward shift of the demand curve or an ability to raise premiums, or both.
Source : SSRN
The macroeconomic consequences of disasters
Abstract
Natural disasters have a statistically observable adverse impact on the macro-economy in the short-run and costlier events lead to more pronounced slowdowns in production. Yet, interestingly, developing countries, and smaller economies, face much larger output declines following a disaster of similar relative magnitude than do developed countries or bigger economies. A close study of the determinants of these adverse macroeconomic output costs reveals several interesting patterns. Countries with a higher literacy rate, better institutions, higher per capita income, higher degree of openness to trade, and higher levels of government spending are better able to withstand the initial disaster shock and prevent further spillovers into the macro-economy. These all suggest an increased ability to mobilize resources for reconstruction. Financial conditions also seem to be of importance; countries with more foreign exchange reserves, and higher levels of domestic credit, but with less-open capital accounts appear more robust and better able to endure natural disasters, with less adverse spillover into domestic production.
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