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

1. the matter OF disaster probability the danger of enormous losses from normal mess ups within the U.S. has considerably elevated in recent times, straining deepest coverage markets and growing frustrating difficulties for disaster-prone parts. the specter of mega-catastrophes caused by severe hurricanes or earthquakes awesome significant inhabitants facilities has dramatically altered the coverage surroundings. 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 assurance examine, 2001).1 A serious catastrophe may 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 variety from $30 billion to $50 billion, and the attack's impression on coverage markets underscores the necessity to comprehend the dynamics of the provision of and the call for for assurance opposed to severe occasions, together with traditional failures. elevated disaster possibility poses tricky 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 admire to how the chance of such occasions are 1 those possible greatest loss (PML) estimates are in response to a SOD-year "return" period.

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Extra resources for Catastrophe Insurance: Consumer Demand, Markets and Regulation

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Best figures on the countrywide combined ratio and operating ratio are consistent with the NAIC profitability estimates. 4 percent), both ratios have stayed above 100 percent. These conditions are clearly not sustainable and help to explain why some insurers have exited the market entirely or are at least pulling out 31 32 The high relative volatility of profits in homeowners insurance is demonstrated in Grace, Klein and Kleindorfer (1998). States other than Florida also suffered some losses from Hurricane Andrew after it moved through Florida to other areas, but Florida suffered most of the financial losses that were incurred.

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. In 33 2. An Overview of Catastrophe Insurance Markets this respect, it is a more inclusive measure than the loss ratio, but it also necessarily includes some formula-based allocations of certain financial items (that are not reported on a by linelby state basis).

Also, the Hannover Group reported no homeowners premiums in 1992 and 1995, but by 1999 it had acquired a 1 percent market share and was ranked 18 th • It should be noted that mergers and acquisitions played a major role in some of these changes, such as the CiticorplTravelers merger. In sum, these trends indicate the dynamic nature of the homeowners insurance market and its vitality. Some insurers have retrenched or left the market. At the same time, other insurers have moved in to take the place of those that left and expand their business.

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