Download Catastrophe Insurance: Consumer Demand, Markets and by Martin F. Grace, Robert W. Klein, Paul R. Kleindorfer, PDF

By Martin F. Grace, Robert W. Klein, Paul R. Kleindorfer, Michael R. Murray

1. the matter OF disaster threat the danger of huge losses from normal failures within the U.S. has considerably elevated lately, straining inner most assurance markets and developing problematic difficulties for disaster-prone components. the specter of mega-catastrophes caused by excessive hurricanes or earthquakes notable significant inhabitants facilities has dramatically altered the assurance surroundings. Estimates of possible greatest losses (PMLs) to insurers from a mega­ disaster impressive the U.S. diversity as much as $100 billion reckoning on the site and depth of the development (Applied assurance study, 2001).1 A serious catastrophe may have an important monetary influence at the (Cummins, Doherty, and Lo, 2002; coverage prone workplace, 1996a). Estimates of gross losses from the terrorist assault on September eleven, 2001 variety from $30 billion to $50 billion, and the attack's impact on assurance markets underscores the necessity to comprehend the dynamics of the availability of and the call for for assurance opposed to severe occasions, together with typical failures. elevated disaster probability poses tough demanding situations for insurers, reinsurers, homeowners and public officers (Kleindorfer and Kunreuther, 1999). the basic quandary matters insurers' skill to address low-probability, high-consequence (LPHC) occasions, which generates a number of interrelated matters with recognize to how the danger of such occasions are 1 those possible greatest loss (PML) estimates are in response to a SOD-year "return" period.

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7 summarize the results for Florida, New York and countrywide. The loss ratio indicates the relationship of incurred losses to premiums earned, which is the principal but not the only factor affecting insurers' profitability in a particular line and state. Profit on insurance transactions, as calculated by the National Association of Insurance Commissioners (NAIC), reflects expenses, taxes and investment income, as well as losses, attributable to the underwriting of a particular line of insurance in a state.

We also tracked total profits on insurance transactions (PIT) as a percentage of direct premiums earned and the estimated rate of return on net worth or equity (ROE). These data also are shown for 1990-2000. Once again, the year Hurricane Andrew hit South Florida (1992) stands out in all of the data. In Florida, both the PIT and ROE were negative in 1992 and 1993. 2 percent ROE for Florida. 1 percent for 1995, when Hurricane Opal occurred). These returns may seem high relative to rates of return in most other industries, but they reflect the need to cover long-term average costs including years with extreme catastrophe losses and, possibly, the risk premium required to write insurance in more volatile regions.

We should note, however, that the increase in average premiums could be mitigated by insureds opting for larger deductibles and other options that would lessen premium increases. In fact, average premiums in the three jurisdictions actually fell from 1997 to 1998. , selection of higher deductibles), rather than decreases in insurers' rates. We should also note that the Florida average premium is moderated by premium levels in low-risk areas in Florida. 29 2. An Overview of Catastrophe Insurance Markets percentage in Florida than in New York and countrywide, although even the Florida increase was relatively small.

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