Catastrophic events, parameter uncertainty and the breakdown of implicit long-term contracting: The case of terrorism insurance

摘要

In an attempt to better understand the process by which the industry moves towards a new market equilibrium following a crisis, the paper distinguishes: 1. The impact of event-induced uncertainty (like parameter uncertainty). 2. Flight to quality in determining the market's evaluation of different insurance companies. After a relevant combing of the extant literature on the theories of insurance market equilibrium and long-term contracting, the paper proposed the following four hypotheses: 1. H1: The market reactions to the WTC attacks will be strongly negative for insurers in the days immediately following the attacks. 2. H2: The WTC attacks created a significant event-induced increase in the variance of insurer returns in the week immediately following the attacks. 3. H3: The significant increase in variance induced by the WTC attacks would persist in the month following the event. 4. H4: The market return to individual insurers following the first week of the WTC attacks will be relatively high for Insurers with strong financial ratings. The stock market sample data of 43 property casualty insurers (during several event windows surrounding September 11) with pre-September market capitalization of over $500 million was used for testing these hypotheses. The empirical results were found to be consistent with the above four hypotheses.