Hostname: page-component-745bb68f8f-lrblm Total loading time: 0 Render date: 2025-01-10T20:46:30.472Z Has data issue: false hasContentIssue false
  • English
  • Français

DIVERSIFICATION IN CATASTROPHE INSURANCE MARKETS

Published online by Cambridge University Press:  02 July 2021

Hengxin Cui ,
Ken Seng Tan  and
Fan Yang
Hengxin Cui
Affiliation:
Department of Statistics and Actuarial Science University of Waterloo, 200 University Avenue West, Waterloo ON, N2L 3G1, Canada E-Mail: [email protected]
Ken Seng Tan
Affiliation:
Division of Banking & Finance Nanyang Business School, Nanyang Technological UniversitySingapore E-Mail: [email protected]
Fan Yang*
Affiliation:
Department of Statistics and Actuarial Science University of Waterloo, 200 University Avenue West Waterloo, ON, N2L 3G1, Canada E-Mail: [email protected]
*
E-Mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Catastrophe insurance markets fail to provide sufficient protections against natural catastrophes, whereas they have the capacity to absorb the losses. In this paper, we assume the catastrophic risks are dependent and extremely heavy-tailed, and insurers have limited liability to cover losses up to a certain amount. We provide a comprehensive study to show that the diversification in the catastrophe insurance markets can be transited from suboptimal to preferred by increasing the number of insurers in the market. This highlights the importance of coordination among insurers and the government intervention in encouraging insurers to participate in the catastrophe insurance market to exploit risk sharing. Simulation studies are provided to illuminate the key findings of our results.

Keywords

Archimedean copulacatastrophe insurance marketsdiversificationheavy taillimited liabilityC60G11L25
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 51 , Issue 3 , September 2021 , pp. 753 - 778
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of The International Actuarial Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alink, S., Löwe, M. and Wüthrich, M.V. (2004) Diversification of aggregate dependent risks. Insurance: Mathematics and Economics 35, 77–95.Google Scholar
Cherubini, U., Luciano, E. and Vecchiato, W. (2004) Copula Methods in Finance. Wiley Finance Series. Chichester: John Wiley & Sons, Ltd.CrossRefGoogle Scholar
Cummins, J.D., Doherty, N. and Lo, A. (2002) Can insurers pay for the “big one”? Measuring the capacity of the insurance market to respond to catastrophic losses. Journal of Banking & Finance 26, 557–583.CrossRefGoogle Scholar
Cummins, J.D. and Mahul, O. (2003) Optimal insurance with divergent beliefs about insurer total default risk. Journal of Risk and Uncertainty 27, 121–138.CrossRefGoogle Scholar
Cummins, J.D. and Mahul, O. (2009) Catastrophe risk financing in development countries: Principles for public intervention. Reference & Research Book News, 24(1). Portland: Ringgold, Inc.Google Scholar
Embrechts, P., Lambrigger, D.D. and Wüthrich, M.V. (2009a) Multivariate extremes and the aggregation of dependent risks: Examples and counter-examples. Extremes 12, 107–127.CrossRefGoogle Scholar
Embrechts, P., McNeil, A.J. and Straumann, D. (2002) Correlation and dependence in risk management: Properties and pitfalls. In Risk Management (pp. 176–223). Cambridge University Press.CrossRefGoogle Scholar
Embrechts, P., Nešlehová, J. and Wüthrich, M.V. (2009b). Additivity properties for Value-at-Risk under Archimedean dependence and heavy-tailedness. Insurance: Mathematics and Economics 44, 164–169.Google Scholar
Froot, K.A. (2001) The market for catastrophe risk: A clinical examination. Journal of Financial Economics 60, 529–571.CrossRefGoogle Scholar
Froot, K.A. and Posner, S.E. (2002) The pricing of event risks with parameter uncertainty. The Geneva Papers on Risk and Insurance Theory 27, 153–165.CrossRefGoogle Scholar
Froot, K.A. and Stein, J.C. (1998) Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach. Journal of Financial Economics 47, 55–82.CrossRefGoogle Scholar
Hoeppe, P. (2016) Trends in weather related disasters–consequences for insurers and society. Weather and Climate Extremes 11, 70–79.CrossRefGoogle Scholar
Hofert, M. and Wüthrich, M.V. (2011) Statistical review of nuclear power accidents. Asia-Pacific Journal of Risk and Insurance 7(1), Article 1.Google Scholar
Holzheua, T. and Turner, G. (2018) The natural catastrophe protection gap: Measurement, root causes and ways of addressing underinsurance for extreme events. The Geneva Papers 43, 37–71.Google Scholar
Ibragimov, R. (2009) Portfolio diversification and value at risk under thick-tailedness. Quantitative Finance 9, 565–580.CrossRefGoogle Scholar
Ibragimov, R., Jaffee, D. and Walden, J. (2009) In Research Handbook on the Economics of Insurance Law (pp.160–189). Beaverton: Ringgold, Inc.Google Scholar
Ibragimov, R. and Prokhorov, A. (2016) Heavy tails and copulas: Limits of diversification revisited. Economics Letters 149, 102–107.CrossRefGoogle Scholar
Ibragimov, R. and Walden, J. (2007) The limits of diversification when losses may be large. Journal of Banking & Finance 31, 2551–2569.CrossRefGoogle Scholar
Ibragimov, R. and Walden, J. (2011) Value at risk and efficiency under dependence and heavy-tailedness: Models with common shocks. Annals of Finance 7, 285–318.CrossRefGoogle Scholar
Jaffee, D. (2015) Catastrophe insurance. In Research Handbook on the Economics of Insurance Law (pp.160–189). Beaverton: Ringgold, Inc.CrossRefGoogle Scholar
Kousky, C. and Cooke, R. (2012) Explaining the failure to insure catastrophic risks. The Geneva Papers on Risk and Insurance-Issues and Practice 37, 206–227.CrossRefGoogle Scholar
McNeil, A.J., Frey, R. and Embrechts, P. (2015) Quantitative Risk Management: Concepts, Techniques and Tools. Princeton Series in Finance, revised edition. Princeton, NJ: Princeton University Press.Google Scholar
Müller, A. (1997) Stop-loss order for portfolios of dependent risks. Insurance: Mathematics and Economics 21, 219–223.CrossRefGoogle Scholar
Nelsen, R.B. (2006) An Introduction to Copulas, second edition. Springer Series in Statistics. New York: Springer.Google Scholar
Resnick, S.I. (1987) Extreme Values, Regular Variation and Point Processes. Springer Series in Operations Research and Financial Engineering. New York: Springer.CrossRefGoogle Scholar
Samuelson, P. (1967) General proof that diversification pays. Journal of Financial and Quantitative Analysis 2(1), 1–13.CrossRefGoogle Scholar
Swiss, RE (2019) Natural catastrophes and man-made disasters in 2018: Secondary perils on the frontline. Sigma No. 2/2019.Google Scholar
Wei, G. and Hu, T. (2002) Supermodular dependence ordering on a class of multivariate copulas. Statistics & Probability Letters 57, 375–385.CrossRefGoogle Scholar
Woo, G. (2011) Calculating Catastrophe. London: Imperial College Press.CrossRefGoogle Scholar