TY  - JOUR
AU  - Froot,Kenneth A.
TI  - The Market for Catastrophe Risk: A Clinical Examination
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8110
PY  - 2001
Y2  - February 2001
UR  - http://www.nber.org/papers/w8110
L1  - http://www.nber.org/papers/w8110.pdf
N1  - Author contact info:
Kenneth A. Froot
Graduate School of Business
Harvard University
Soldiers Field
Boston, MA 02163
Tel: 617/495-6677
Fax: 617/496-7357
E-Mail: kfroot@hbs.edu
AB  - This paper examines the market for catastrophe event risk   i.e., financial claims that are linked to losses associated with natural hazards, such as hurricanes and earthquakes. Risk management theory suggests protection by insurers and other corporations against the largest cat events is most valuable. We show, however, that historically most insurers have purchased relatively little cat reinsurance against large events.  We also find that premiums are high relative to expected losses, especially after cat events. We then examine clinical evidence to understand why the theory fails.  Specifically, we examine transactions that look to capital markets, rather than traditional reinsurance markets, for risk-bearing capacity. These provide hints as to why the theory fails. We explore these hints in eight theoretical explanations and find the most compelling to be supply restrictions associated with capital market imperfections and market power exerted by traditional reinsurers.
ER  -