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 hazard the chance of enormous losses from average mess ups within the U.S. has considerably elevated lately, straining deepest assurance markets and developing not easy difficulties for disaster-prone parts. the specter of mega-catastrophes caused by severe hurricanes or earthquakes amazing significant inhabitants facilities has dramatically altered the coverage setting. Estimates of possible greatest losses (PMLs) to insurers from a mega­ disaster extraordinary the U.S. variety as much as $100 billion reckoning on the site and depth of the development (Applied assurance examine, 2001).1 A critical catastrophe may have an important monetary effect at the (Cummins, Doherty, and Lo, 2002; assurance companies 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 impression on coverage markets underscores the necessity to comprehend the dynamics of the provision of and the call for for coverage opposed to severe occasions, together with traditional failures. elevated disaster probability poses tricky demanding situations for insurers, reinsurers, homeowners and public officers (Kleindorfer and Kunreuther, 1999). the elemental predicament issues insurers' skill to deal with low-probability, high-consequence (LPHC) occasions, which generates a number of interrelated matters with appreciate to how the danger of such occasions are 1 those possible greatest loss (PML) estimates are in line with a SOD-year "return" period.

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But, the desirability of easing state restrictions on reinsurers must be balanced against the risk of allowing participation by reinsurers who will ultimately fail to fulfill their obligations in the wake of a major catastrophe. 3 Chapter 3 Regulatory Intervention and Guaranty Funds Regulatory actions against failing insurers and the use of guaranty funds are an important component of solvency regulation. Natural disasters pose a serious threat to state guaranty funds. Guaranty funds can accommodate short-term capacity problems by boosting assessment limits and borrowing funds, but high insolvency costs from a large natural disaster could severely tax the capacity of a guaranty fund and the market supporting it.

Insurers are allowed to file either loss cost multipliers that convert advisory prospective loss costs to the final rates or final rates as they did before the advent of advisory loss costs. The intent of this system is to promote independence and competition among insurers by having each set its own provisions for underwriting expenses and profits. 1 State Rate Filing Requirements Homeowners Multiperil: As 0 f J UI~ I 2002 Type of Rating Law Prior Approval Alaska Prior Approval Arizona Use and File Kansas File and Use Kentucky Flex Rating Louisiana Modified Prior Approval Maine File and Use Maryland Prior Approval Massachusetts File and Use Michigan File and Use Minnesota File and Use Mississippi Prior Approval Missouri Use and File Montana File and Use Nebraska Prior Approval Nevada Prior Approval New Hampshire File and Use New Jersey Prior Approval New Mexico Prior Approval New York File and Use North Carolina Prior Approval North Dakota Prior Approval Ohio Prior Approval Oklahoma File and Use Oregon File and Use Pennsylvania Prior Approval Rhode Island File and Use South Carolina Prior Approval South Dakota Prior Approval Tennessee Prior Approval Texas Flex Rating Utah Use and File Vermont Use and File Virginia File and Use Washington Prior Approval West Virginia Prior Approval Wisconsin Use and File Wyoming No File Note: In some states, commIssIoner may Impose pnor approval If market is deemed "noncompetitive," State ~Iabama Source: NAIC In addition, insurers must obtain approval for the products that they sell and, specifically, the policy forms that they use.

In Florida, Coverage A limits generally increased, which is likely due to rising home values and, possibly, an increase of policy limits relative to home value. 24 The shift in deductibles, particularly for wind, was more dramatic. We converted percentage deductibles to dollar amounts to place all deductibles on a comparable basis. 2 percent of policies had wind deductibles between $100 and $250. 4 percent were in excess of $1,000. 25 If insurers offered significant discounts or other inducements for higher wind 23 24 25 Spatial economies refer to the efficiencies gained from serving a larger number of policyholders who are geographically proximate.

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