2014 Robert C. Witt Award

The recipients of the 2014 Witt Award are Alex Boulatov from the University of Houston

Boulatov

Boulatov

and Stephan Dieckmann from the University of Pennsylvania for “The Risk-Sharing Implications of Disaster Insurance Funds”, JRI, March
2013, Vol. 80, Issue 1, pages 37-64.

Diekmann

Diekmann

Abstract:

We study the risk-sharing implications that arise from introducing a disaster insurance fund to the cat insurance market. Such a form of intervention can increase efficiency in the private market, and our design of disaster insurance suggests a prominent role of catastrophe reinsurance. The model predicts buyers will increase their demand in the private market, and the seller will lower prices to such an extent that their revenues decrease upon introduction of disaster insurance. We test two predictions in the context
of the Terrorism Risk Insurance Act (TRIA). It is already known that the
introduction of TRIA led to negative abnormal returns in the insurance
industry.
In addition, we show this negative effect is stronger for larger and for
low-risk-averse firms‹two results that are consistent with our model. The
seller¹s risk aversion plays an important role in quantifying such feedback
effects, and we point toward possible distortions in which a firm may even
be overhedged upon introduction of disaster insurance.

 

 

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