An Industrial Organization Theory of Risk Sharing

Examining the global reinsurance market for catastrophic losses, we propose a new theory of optimal risk sharing that finds its inspiration in the economic theory of the firm. Our model offers a theoretical foundation for the vertical and horizontal tranching of insurance contracts (also known respectively as proportional and excess of loss reinsurance contracts). Using a two-factor production model popular in industrial economics, we show how reinsurance should be optimally layered (with attachment and detachment points) for a given book of business. This allows us to find the minimum insurance premium necessary to cover the cost of catastrophic events. We conclude with public policy implications by showing the conditions under which government intervention in the catastrophic loss insurance industry can reduce the cost to society of bearing risk and increase its welfare.Reinsurance; Cost of capital; Catastrophic risk; Government intervention in insurance markets,

Into harm\u27s way: The relationship between homeowners\u27 insurance premiums, property values, and natural hazards

This research is an attempt to model and analyze the effects that changes in property insurance markets will have on real estate markets, in particular, single family residential housing markets. The main contribution of this dissertation will evaluate the effects that higher homeowners\u27 insurance premiums in hazard prone areas will have on property values in the short run and community size in the long run. Increases in homeowners\u27 insurance premiums in hazard prone areas increases the cost of providing these goods and services thus reducing the demand for individuals to locate in that area. Chapter 3 presents a theoretical approach to explaining how these shifts in the demand for property affect prices in the short run and quantity in the long run. The theoretical approach incorporated is a stock-flow model of single-family residential housing supply and demand developed by DiPasquale and Wheaton. The model will show that increases in insurance premiums due to a re-evaluation of expected loss following a natural disaster would lower property values in the short run and reduce community size in the long run. Chapter 4 will provide evidence that the re-evaluation of expected loss theory presented in Chapter 3 has empirical support. In addition, there is moderate support to show that increases in homeowners\u27 insurance rates following a natural disaster have led to decreases in property values in the affected areas in the short run, and a reduction in community size in the long run. Finally, there is some moderate support for the theory that property values are also reduced by non-insurable costs associated with natural hazards in these areas as well

Into harm\u27s way: The relationship between homeowners\u27 insurance premiums, property values, and natural hazards

This research is an attempt to model and analyze the effects that changes in property insurance markets will have on real estate markets, in particular, single family residential housing markets. The main contribution of this dissertation will evaluate the effects that higher homeowners\u27 insurance premiums in hazard prone areas will have on property values in the short run and community size in the long run. Increases in homeowners\u27 insurance premiums in hazard prone areas increases the cost of providing these goods and services thus reducing the demand for individuals to locate in that area. Chapter 3 presents a theoretical approach to explaining how these shifts in the demand for property affect prices in the short run and quantity in the long run. The theoretical approach incorporated is a stock-flow model of single-family residential housing supply and demand developed by DiPasquale and Wheaton. The model will show that increases in insurance premiums due to a re-evaluation of expected loss following a natural disaster would lower property values in the short run and reduce community size in the long run. Chapter 4 will provide evidence that the re-evaluation of expected loss theory presented in Chapter 3 has empirical support. In addition, there is moderate support to show that increases in homeowners\u27 insurance rates following a natural disaster have led to decreases in property values in the affected areas in the short run, and a reduction in community size in the long run. Finally, there is some moderate support for the theory that property values are also reduced by non-insurable costs associated with natural hazards in these areas as well

Market Growth and Barriers to Entry: Evidence from the Title Insurance Industry

The purpose of this paper is to examine barriers to entry in an insurance market wherein banks are an integral part of the distribution system: Title insurance. Given that the title insurance industry is characterized by two major entry barriers, controlled business arrangements and title plants, we test different industrial organization growth models with barriers to entry to determine which model best describes the title insurance industry. The empirical analysis we present suggests that the theoretical model that explains more accurately the current title insurance industry structure is the Salop circular-city model.L’objectif de cette recherche est d’étudier les barrières à l’entrée dans un marché de l’assurance où les banques font partie intégrante du système de distribution : le marché de l’assurance-titres. L’industrie de l’assurance-titres étant caractérisée par deux types de barrières à l’entrée, soit les ententes régies entre entreprises et les banques de données géographiques (title plants), nous évaluons différents modèles de croissance organisationnelle avec des barrières à l’entrée pour identifier quel modèle représente le mieux l’industrie de l’assurance-titres. L’analyse empirique que nous présentons conclue que le modèle théorique qui reproduit le plus exactement la structure de l’industrie de l’assurance-titres est le modèle de Salop de la route circulaire

Banks as Insurance Referral Agents? The Convergence of Financial Services: Evidence from the Title Insurance Industry

Le but de cet article est de donner un aperçu de la structure éventuelle du marché de l'assurance IARD aux États-Unis si les banques continuent de pénétrer le marché de l'assurance IARD au même rythme qu'actuellement. À cette fin, nous étudions un marché de l'assurance où les banques ont déjà un rôle prépondérant, soit l'assurance titre de propriété. Nous comparons les canaux de distribution utilisés pour vendre l'assurance titre et les canaux utilisés par les banques pour entrer dans le marché de l'assurance IARD. Le marché de l'assurance titre est caractérisé par deux importantes barrières à l'entrée: les alliances stratégiques et les banques de transactions immobilières. Dans cet article, nous testons différents modèles de croissance développés en organisation industrielle où il existe des barrières à l'entrée. Nos tests empiriques semblent supporter le modèle de croissance basé sur le modèle circulaire de Salop. Ainsi, nous concluons que si les banques pénètrent de manière significative le marché de l'assurance IARD, nos résultats offrent un aperçu de la structure future de ce marché.The purpose of this paper is to offer a glimpse into the potential industrial organization of the property casualty insurance (P&C) market if banks continue to penetrate it at current rates. To do so, we study an insurance market where banks are already integral in distribution: Title insurance. We draw some broad comparisons between the distribution channels used to sell title insurance and the channel used by banks entering the P&C market. The title insurance industry is characterized by two major entry barriers: Controlled business arrangements and title plants. Although title insurance has not generated much academic interest compared to other insurance products, title insurance is an insurance product wherein the distribution process banks have traditionally been heavily involved. In this paper, we test different industrial organization growth models with barriers to entry. Our empirical analysis suggests that the current title insurance industry structure fits the Salop circular-city model. Our contention is that if banks continue their current trend of market penetration in property casualty markets, the results presented herein could potentially offer an insight into the future structure of the P&C market

An Industrial Organization Theory of Risk Sharing

Examining the global reinsurance market for catastrophic losses, we propose a new theory of optimal risk sharing that finds its inspiration in the economic theory of the firm. Our model offers a theoretical foundation for the vertical and horizontal tranching of insurance contracts (also known respectively as proportional and excess of loss reinsurance contracts). Using a two-factor production model popular in industrial economics, we show how reinsurance should be optimally layered (with attachment and detachment points) for a given book of business. This allows us to find the minimum insurance premium necessary to cover the cost of catastrophic events. We conclude with public policy implications by showing the conditions under which government intervention in the catastrophic loss insurance industry can reduce the cost to society of bearing risk and increase its welfare

Demographic Factors and Price Distortions in Insurance

Few papers have analyzed the potential linkages between price distortions and the specific demographic and political traits of customers. The existence of price distortions may have adverse and potentially unintended impacts on certain demographic groups, leading to significant public policy concerns. The current study uses census tract data and rating factors to examine age, income, and race demographics in an effort to determine if any subgroups of the population are adversely impacted by the price distortions of property insurance. The results suggest that Hispanics, lower income households, and specific age groups pay relatively more for insurance coverage than comparison groups

The Florida Catastrophic Storm Risk Management Center The Capitalization of Homeowners Insurance Premiums in House Prices THE CAPITALIZATION OF HOMEOWNERS INSURANCE PREMIUMS IN HOUSE PRICES THE CAPITALIZATION OF HOMEOWNERS INSURANCE PREMIUMS IN HOUSE PRIC

Executive Summary The primary questions of interest in this study are whether and, if so to what extent, changes in homeowners insurance premiums affect real estate prices. As a cost of owning a home, homeowners insurance would have an impact on the homeownership decision, but in normal times one would expect the impact to be marginal. However, during a period of high insurance costs or rapidly increasing premiums, these costs would likely have a stronger effect on housing demand and the capitalization of these higher costs into house prices could create a downward pressure on prices. The supply of housing could also be affected as homeowners find the increasing ownership costs a hardship or unbearable and decide to terminate ownership. As such, higher insurance costs could have a significant impact by both reducing the demand and increasing the supply of housing. with adjustable-rate mortgages, which had become popular in the early-mid 2000s, experienced increasing contract rates and payments as these loans reset. Borrowers with interest-only adjustable-rate loans, which had also become more popular over the last several years, saw an even more dramatic increase as payments became amortizing. Second, the dramatic increase in property values in the early-mid 2000s led to continual increases in property taxes as property assessments increased. Insurance provided the third, and in some cases, most visible evidence of increasing homeownership costs. A doubling of premiums was not uncommon in areas of the state that had the highest natural disaster risk exposure. Many highly leveraged homeowners had little or no additional income to offset these increasing costs and were forced to consider selling their properties. Simultaneously, however, demand for real estate was decreasing as prospective buyers factored these additional costs into the prices they were willing to pay. The size and price volatility of the Florida housing market over the 2004-2009 time period in conjunction with the shock losses that the property insurance market sustained over this period provide an excellent setting in which to examine the relationship between a significant housing cost factor (homeowner's insurance) and the demand for residential real estate. Given that property taxes are a main revenue source for many states and local jurisdictions and given that property tax collections are based on property values that can be affected by factors such as changes in insurance costs, it is important to better understand the cost factors that ultimately have a significant impact on the demand for real estate and real estate prices. A better understanding of these relationships can provide for more effective public policy decisions regarding insurance pricing and regulation of the insurance industry in general. This study examines the extent to which changes in homeowners insurance premiums affect the demand for housing. Previous research, using primarily floodplain data, has shown that increased insurance costs are negatively capitalized into house prices. This study used Miami-Dade County home sales and Citizens Property Insurance Corporation data for the period 2004 through 2009 to measure the capitalization effect of increases in premiums on house prices. Using a hedonic pricing model and measures of changes in homeowners insurance premiums over one-, two-and three-period segments prior to the sale of the property, the results showed that increases in premiums are negatively capitalized in prices. In the data used in this study, homeowners spent an average of $2,145 per year for property insurance. The changes in insurance premiums during the time period were dramatic: the one-, two-, and three-year decreased the average house price by$13,484.62. These changes in the average house price produce implied cap rates of 11.53%, 8.92%, and 11.55%, respectively for the one-, two-, and three-year premium increases. THE CAPITALIZATION OF HOMEOWNERS INSURANCE PREMIUMS IN HOUSE PRICES Abstract This study examines the impact of changes in property insurance premiums on house prices. Previous research, using primarily floodplain data, has shown that increased insurance costs are negatively capitalized into house prices. This study uses Miami-Dade County home sales and Citizens Property Insurance Corporation data for the period 2004 through 2009 to measure the capitalization effect of increases in premiums on house prices. Using a hedonic pricing model and measures of changes in homeowners insurance premiums over one-, two-and three-period segments prior to the sale of the property, the results show that increases in premiums are negatively capitalized in prices