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

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

1. the matter OF disaster chance the danger of huge losses from common mess ups within the U.S. has considerably elevated in recent times, straining deepest coverage markets and developing difficult difficulties for disaster-prone parts. the specter of mega-catastrophes as a result of extreme hurricanes or earthquakes impressive significant inhabitants facilities has dramatically altered the coverage atmosphere. Estimates of possible greatest losses (PMLs) to insurers from a mega­ disaster amazing the U.S. diversity as much as $100 billion reckoning on the site and depth of the development (Applied coverage study, 2001).1 A serious catastrophe can have an important monetary influence at the (Cummins, Doherty, and Lo, 2002; coverage prone place of work, 1996a). Estimates of gross losses from the terrorist assault on September eleven, 2001 diversity from $30 billion to $50 billion, and the attack's influence on coverage markets underscores the necessity to comprehend the dynamics of the availability of and the call for for coverage opposed to severe occasions, together with average failures. elevated disaster possibility poses tough demanding situations for insurers, reinsurers, homeowners and public officers (Kleindorfer and Kunreuther, 1999). the basic problem issues insurers' skill to deal with low-probability, high-consequence (LPHC) occasions, which generates a bunch of interrelated concerns with admire to how the danger of such occasions are 1 those possible greatest loss (PML) estimates are in keeping with a SOD-year "return" period.

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Catastrophe losses have contributed to these adverse results, but there are probably other contributors as well. It follows that prices must rise and/or costs must be reduced in states besides Florida if the market is to stabilize. Chapter 3 REGULATORY INSTITUTIONS AND POLICIES Because of intense economic and political pressures, state governments have intervened in catastrophe insurance markets in significant ways. Insurers and insurance markets are regulated primarily at the state level (Klein, 1998b).

The operating ratio reflects losses, expenses and investment income. These measures are calculated on a net (of reinsurance) basis. It helps to keep in mind that, unlike profit on insurance transactions and rates of return on net worth, high loss ratios, combined ratios and operating ratios indicate low profitability. Loss ratios above 100 indicate that losses exceeded premiums. Combined ratios above 100 indicate losses and underwriting expenses exceeded premiums. Operating ratios above 100 indicate a loss on underwriting even after taking investment income into account.

The hypothetical premiums also increased in Orlando, but to a much lesser degree than in Miami Beach. The insurers' Miami Beach premiums for 1996 are more than two times higher than their corresponding premiums for Orlando. 2. An Overview of Catastrophe Insurance Markets 31 This suggests that both overall price levels in the state and price differentials between coastal and non-coastal areas increased significantly. This is consistent with what we would expect to see as insurers adjusted their rates to reflect increased catastrophe risk and other factors.

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