Catastrophic Losses and Insurer Profitability: Evidence From 9/11

• Published in: The Journal of risk and insurance 2008-03, Vol.75 (1), p.39-62
• Main Authors: Chen, Xuanjuan, Doerpinghaus, Helen, Lin, Bing-Xuan, Yu, Tong
• Format: Article
• Language: English
• Subjects: Analytical forecasting; Catastrophes; Catastrophes (Mathematics); Earnings forecasting; Earnings per share; Earthquake insurance; Earthquakes; Effects; Estimates; Evaluation; Financial analysis; Forecasting techniques; Insurance brokers; Insurance claims; Insurance coverage; Insurance industry; Insurance providers; Insured losses; Liability insurance; Losses; Mathematical models; Profitability; Profits; Property liability insurance; Reinsurance; Revisions; September 11 terrorist attacks-2001; Services; Social aspects; Statistical forecasts; Stock prices; Stockholders; Studies; Tax rates; Terrorism; Terrorism insurance; Underwriting
• ISSN: 0022-4367; 1539-6975
• DOI: 10.1111/j.1539-6975.2007.00247.x

We examine the effects of 9/11 on the insurance industry, hypothesizing a short-run claim effect, resulting from insufficient premium ex ante for catastrophic losses, and a long-run growth effect, resulting from ex post insurance supply reductions and risk updating. Following Yoon and Starks (1995) we use short- and long-run abnormal forecast revisions to measure both effects, analyzing them as a function of firm-specific characteristics. We find that firm type, loss estimates, reinsurance use, and tax position are important determinants of the short-run position. Firm type, loss estimates, financial strength, underwriting risk, and reinsurance are key determinants of the firm's long-run position.