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1 – 10 of over 1000Due to climate change and an increasing concentration of the world’s population in vulnerable areas, how to manage catastrophe risk efficiently and cover disaster losses fairly is…
Abstract
Purpose
Due to climate change and an increasing concentration of the world’s population in vulnerable areas, how to manage catastrophe risk efficiently and cover disaster losses fairly is still a universal dilemma.
Methodology
This paper applies a law and economic approach.
Findings
China’s mechanism for managing catastrophic disaster risk is in many ways unique. It emphasizes government responsibilities and works well in many respects, especially in disaster emergency relief. Nonetheless, China’s mechanism which has the vestige of a centrally planned economy needs reform.
Practical Implications
I propose a catastrophe insurance market-enhancing framework which marries the merits of both the market and government to manage catastrophe risks. There are three pillars of the framework: (i) sustaining a strong and capable government; (ii) government enhancement of the market, neither supplanting nor retarding it; (iii) legalizing the relationship between government and market to prevent government from undermining well-functioning market operations. A catastrophe insurance market-enhancing framework may provide insights for developing catastrophe insurance in China and other transitional nations.
Originality
First, this paper analyzes China’s mechanism for managing catastrophic disaster risks and China’s approach which emphasizes government responsibilities will shed light on solving how to manage catastrophe risk efficiently and cover disaster losses fairly. Second, this paper starts a broader discussion about government stimulation of developing catastrophe insurance and this framework can stimulate attention to solve the universal dilemma.
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Charles C. Yang, Mulong Wang and Xiaoying Chen
Conventional wisdom states that catastrophe risk securities show no or little correlation with stock and bond markets, and offer significant attractions to investors providing a…
Abstract
Purpose
Conventional wisdom states that catastrophe risk securities show no or little correlation with stock and bond markets, and offer significant attractions to investors providing a good diversification of risks. This study examines the correlation between catastrophe risk securities and portfolios of other equities by analyzing catastrophe effects on the Japanese stock market.
Design/methodology/approach
Using catastrophe data from SwissRe Sigma publications and stock returns from the Pacific‐Basin Capital Markets database, this paper analyzes stock and abnormal returns in the Japanese stock market using event study methodology.
Findings
For the Japanese stock market as a whole, there is no significant catastrophe effect. The results indicate a significant negative correlation between catastrophe loss amount and the insurance industry's equity returns and abnormal returns, a significant positive correlation with the construction industry, but no significant correlation with the real estate industry. This paper also analyzes the impact of catastrophe causalities. The results show little evidence on the significance of these variables.
Originality/value
This study provides important insights to the insurance/reinsurance industry in the Japanese risk market for catastrophe property and mortality risk securitization and to investors who are interested in further improvement of their portfolio risk/return profile by including catastrophe risk securities.
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Christopher L. Culp and Kevin J. O'Donnell
Property and casualty (“P&C”) insurance companies rely on “risk capital” to absorb large losses that unexpectedly deplete claims‐paying resources and reduce underwriting capacity…
Abstract
Purpose
Property and casualty (“P&C”) insurance companies rely on “risk capital” to absorb large losses that unexpectedly deplete claims‐paying resources and reduce underwriting capacity. The purpose of this paper is to review the similarities and differences between two different types of risk capital raised by insurers to cover losses arising from natural catastrophes: internal risk capital provided by investors in insurance company debt and equity; and external risk capital provided by third parties. The paper also explores the distinctions between four types of external catastrophe risk capital: reinsurance, industry loss warranties, catastrophe derivatives, and insurance‐linked securities. Finally, how the credit crisis has impacted alternative sources of catastrophe risk capital in different ways is considered.
Design/methodology/approach
The discussion is based on the conceptual framework for analyzing risk capital developed by Merton and Perold.
Findings
In 2008, the P&C insurance industry was adversely affected by significant natural catastrophe‐related losses, floundering investments, and limited access to capital markets, all of which put upward pressure on catastrophe reinsurance premiums. But the influx of new risk capital that generally accompanies hardening markets has been slower than usual to occur in the wake of the credit crisis. Meanwhile, disparities between the relative costs and benefits of alternative sources of catastrophe risk capital are even more pronounced than usual.
Originality/value
Although many insurance companies focus on how much reinsurance to buy, this paper emphasizes that a more important question is how much risk capital to acquire from external parties (and in what form) vis‐à‐vis investors in the insurance company's own securities.
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Aglaia Petseti and Milton Nektarios
The present article serves two main goals. First, the proposed scheme for Greece is being involved in a benchmarking analysis. Second, an expansion of previous quantitative models…
Abstract
Purpose
The present article serves two main goals. First, the proposed scheme for Greece is being involved in a benchmarking analysis. Second, an expansion of previous quantitative models is undertaken in order to estimate risk‐based premiums for the proposed national insurance scheme.
Design/methodology/approach
The benchmarking analysis of the proposed scheme is undertaken in comparison to the best practices of the catastrophe insurance systems operating in most member‐states of the EU. Risk modelling is employed to calculate risk‐based premiums.
Findings
The benchmarking analysis leads to conclusions which may be useful for the stage of actual implementation of such a program in Greece. Risk‐based premiums for the proposed national insurance scheme are estimated for all CRESTA zones of the country.
Research limitations/implications
Uncertainty of estimated catastrophe losses is a limitation of the research.
Practical implications
The paper provides a detailed description of the proposed earthquake insurance scheme.
Social implications
The Greek Government should evaluate the proposal for the establishment of a national insurance program for earthquake damages.
Originality/value
The paper's originality/value consists of the construction of a unique data bank of the residential stock of Greece, and a comprehensive proposal for earthquake insurance, based on the best practices of national Cat insurance schemes.
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PETER NAKADA, HEMANT SHAH, H. UGUR KOYLUOGLU and OLIVIER COLLIGNON
Is the U.S. property & casualty (P&C) insurance industry overcapitalized? Many practitioners and industry observers claim that the industry is awash in capital, and that this…
Abstract
Is the U.S. property & casualty (P&C) insurance industry overcapitalized? Many practitioners and industry observers claim that the industry is awash in capital, and that this excess capital has driven prices to historical lows. Others claim that the industry is undercapitalized relative to a large but plausible natural disaster, such as a large Tokyo earthquake, or a Category 5 hurricane through Miami — a “super catastrophe” in industry jargon.
As an alternative source of capital to traditional reinsurance, catastrophe (cat) bond issuance, a securitised type of insurance against catastrophe-linked losses, is reaching new…
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DOI: 10.1108/OXAN-DB265739
ISSN: 2633-304X
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Topical
Key elements of disaster management are prevention, mitigation, preparedness, response and relief, rehabilitation. The various stakeholders in the process of disaster mitigation…
Abstract
Key elements of disaster management are prevention, mitigation, preparedness, response and relief, rehabilitation. The various stakeholders in the process of disaster mitigation are policy makers, decision makers, administration, professionals, professional institutions, R&D institutions, financial institutions, insurance sector, community, NGOs and the common man. Insurance has played a very important role. The advanced countries have developed the insurance system and made it effective and mandatory – as a result the loss of lives and property is comparatively less. In India, most of the losses suffered in natural disasters are not insured, for reasons such as lack of purchasing power, lack of interest in insurance, theory of karma attitude and ignorance of availability of such covers. Quite large numbers of agencies provide the insurance cover and foreign insurance companies have already ventured in such areas. This implies that the commercial and private sector can also play an essential role in disaster mitigation. The present study attempts to fill the gap in studies on the role of the insurance sector in disaster management.
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I build an equilibrium model trying to reconcile investor preferences with several features of the cat bond market. The driving force behind the model is a habit process, in that…
Abstract
I build an equilibrium model trying to reconcile investor preferences with several features of the cat bond market. The driving force behind the model is a habit process, in that catastrophes are rare economic shocks that could bring investors closer to their subsistence level. The calibration requires shocks with an impact between −1% and −3% to explain a reasonable level of cat bond spreads. Such investor preferences are not only able to generate realistic cat bond returns and price comovement among different perils, but may also able to explain why cat bonds offer higher rewards compared to equally rated corporate bonds.
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