Working Paper: NBER ID: w12348
Authors: W. Kip Viscusi; Patricia Born
Abstract: Natural catastrophes often have catastrophic risks on insurance companies as well as on the insured. Using a very large dataset on homeowners' insurance coverage by state, by firm, and by year for the 1984 to 2004 period, this paper documents the positive effect on losses and loss ratios of both unexpected catastrophes as well as large events that the authors term "blockbuster catastrophes." Insurers adapt to these catastrophic risks by raising insurance rates, leading to lower loss ratios after the catastrophic event. There is a widespread event of unexpected catastrophes and blockbuster catastrophes that reduces total premiums earned in the state, reduces the total number writing insurance coverage in the state, and leads to the exit of firms from the state. Firms with low levels of homeowners' premiums are most adversely affected by the catastrophes.
Keywords: natural disasters; insurance markets; catastrophic risks; homeowners insurance
JEL Codes: D8; G22; K13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected catastrophes (H84) | increased loss ratios (G22) |
| unexpected catastrophes (H84) | increased loss ratios (lagged) (G22) |
| blockbuster catastrophes (H84) | increased loss ratios (G22) |
| blockbuster catastrophes (H84) | increased loss ratios (offsetting effect) (G22) |
| catastrophic events (H84) | reduced total premiums earned (G22) |
| increase in unexpected catastrophes (H84) | higher probability of firms exiting the market (L11) |