Working Paper: NBER ID: w19532
Authors: Erwann Michel-Kerjan; Paul Raschky; Howard Kunreuther
Abstract: Since the passage of the Terrorism Risk Insurance Act of 2002, corporate terrorism insurance is sold as a separate policy from commercial property coverage. In this paper, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique dataset of insurance policies purchased by large U.S. firms, combined with financial information of the corporate clients and of the insurance provider, we apply a two-stage least squares (2SLS) approach to obtain consistent estimates of premium elasticity of corporate demand for property and terrorism coverage. Our findings suggest that both are rather price inelastic and that corporate demand for terrorism insurance is significantly more price inelastic than demand for property insurance. We further find a negative relation between the solvency ratios of both property and terrorism risk coverage, with a stronger effect on the latter, indicating that companies use their ability to self-insure as a substitute for market insurance. Our results are robust to the application of alternative estimators as well as changes in the econometric specifications.
Keywords: insurance; corporate demand; terrorism; property markets
JEL Codes: G22; H56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| solvency ratios (G32) | insurance coverage (G52) |
| firm size (L25) | insurance coverage (G52) |
| insurance premium (G52) | degree of coverage (G52) |