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'Catastrophe Risk Financing in Developing Countries' provides a detailed analysis of the imperfections and inefficiencies that impede the emergence of competitive catastrophe risk markets in developing countries. The book demonstrates how donors and international financial institutions can assist governments in middle- and low-income countries in promoting effective and affordable catastrophe risk financing solutions. The authors present guiding principles on how and when governments, with assistance from donors and international financial institutions, should intervene in catastrophe insurance markets. They also identify key activities to be undertaken by donors and institutions that would allow middle- and low-income countries to develop competitive and cost-effective catastrophe risk financing strategies at both the macro (government) and micro (household) levels. These principles and activities are expected to inform good practices and ensure desirable results in catastrophe insurance projects. 'Catastrophe Risk Financing in Developing Countries' offers valuable advice and guidelines to policy makers and insurance practitioners involved in the development of catastrophe insurance programs in developing countries.

The paper examines efficiency, productivity and scale economies in the U.S. property-liability insurance industry. Productivity change is analyzed using Malmquist indices, and efficiency is estimated using data envelopment analysis. The results indicate that the majority of firms below median size in the industry are operating with increasing returns to scale, and the majority of firms above median size are operating with decreasing returns to scale. However, a significant number of firms in each size decile have achieved constant returns to scale. Over the sample period, the industry experienced significant gains in total factor productivity, and there is an upward trend in scale and allocative efficiency. More diversified firms and insurance groups were more likely to achieve efficiency and productivity gains. Higher technology investment is positively related to efficiency and productivity improvements.

This article uses daily market value data on credit default swap spreads and intraday stock prices to measure systemic risk in the insurance sector. Using the systemic risk measure, we examine the interconnectedness between banks and insurers with Granger causality tests. Based on linear and nonlinear causality tests, we find evidence of significant bidirectional causality between insurers and banks. However, after correcting for conditional heteroskedasticity, the impact of banks on insurers is stronger and of longer duration than the impact of insurers on banks. Stress tests confirm that banks create significant systemic risk for insurers but not vice versa.

Purchasing reinsurance reduces insurers’ insolvency risk by stabilising loss experience, increasing capacity, limiting liability on specific risks and/or protecting against catastrophes. Consequently, purchasing reinsurance should reduce capital costs. However, transferring risk to reinsurers is expensive. The cost of reinsurance for an insurer can be much larger than the actuarial price of the risk transferred. In this article, we analyse empirically the costs and the benefits of reinsurance for a sample of U.S. property–liability insurers. The results show that the purchase of reinsurance significantly increases insurers’ costs but significantly reduces the volatility of the loss ratio. With purchasing reinsurance, insurers accept to pay higher costs of insurance production to reduce their underwriting risk.

In this paper, we investigate earnings management surrounding forced CEO turnover for U.S. property-casualty insurance companies with differing organizational forms. We analyze the three principal organizational form types in the industry—publicly-traded stocks, closely-held stocks, and mutuals. We utilize a unique measure of earnings management, the loss reserve error. Multivariate results show that all ownership types over-state earnings during our sample period whether or not forced turnover occurs. Over-statement is highest for publicly-traded stocks, followed by closely-held stocks and mutuals. Organizational form matters in constraining managerial opportunism in the presence of forced turnovers. Incumbent CEOs of publicly-traded stocks manage earnings upward prior to forced turnovers, consistent with the cover-up hypothesis, but this hypothesis is not consistently supported for mutuals or closely-held stocks. The univariate results support the big-bath hypothesis for closely-held stocks, but the multivariate results do not support the big-bath hypothesis for any organizational form. Finally, corporate governance matters—high board independence and large board sizes are associated with less income over-statement.

One of the most significant economic developments of the past decade has been the convergence of the financial services industry, particularly the capital markets and (re) insurance sectors. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re) insurance underwriting cycles, advances in computing and communications technologies, the emergence of enterprise risk management, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset-backed securities, futures, and options that provide direct access to capital markets. This article provides a survey and overview of the hybrid and pure financial markets instruments and provides new information on the pricing and returns on contracts such as industry loss warranties and Cat bonds.

Organizational form in insurance has been widely studied in the prior literature. Although researchers have recognized sub-types of stock insurers, mutuals have always been considered as a single homogeneous category. To the extent that mutual sub-types behave differently, considering all mutuals the same can result in misleading conclusions. The present study aims to remedy this gap in the literature by considering the full range of mutual firm types. Mutuals are classified as family-controlled, association-controlled, and pure mutuals with various sub-types within each group. We analyze corporate governance among mutual sub-types in the U.S. property–casualty (P–C) insurance industry by studying CEO turnover, particularly nonroutine turnover. Multinomial probit analysis is used to test for relationships between mutual sub-types and turnover. The principal finding is that all mutuals are not the same. The probability of nonroutine CEO turnover is lowest for family-controlled, non-association mutuals and highest for association-controlled mutuals. Non-association mutuals with family-member CEOs have the lowest turnover rates among all ownership types. Thus, future research should utilize more detailed organizational form categories than the traditional literature.

This article considers strengths and weaknesses of reinsurance and securitization in managing insurable risks. Traditional reinsurance operates efficiently in managing relatively small, uncorrelated risks and in facilitating efficient information sharing between cedants and reinsurers. However, when the magnitude of potential losses and the correlation of risks increase, the efficiency of the reinsurance model breaks down, and the cost of capital may become uneconomical. At this juncture, securitization has a role to play by passing the risks along to broader capital markets. Securitization also serves as a complement for reinsurance in other ways such as facilitating regulatory arbitrage and collateralizing low-frequency risks.

This article reviews the current status of the market for catastrophic risk (CAT) bonds and other risk‐linked securities. CAT bonds and other risk‐linked securities are innovative financial vehicles that have an important role to play in financing mega‐catastrophes and other types of losses. The vehicles are especially important because they access capital markets directly, exponentially expanding risk‐bearing capacity beyond the limited capital held by insurers and reinsurers. The CAT bond market has been growing steadily, with record amounts of risk capital raised in 2005, 2006, and 2007. CAT bond premia relative to expected losses covered by the bonds have declined by more than one‐third since 2001. CAT bonds now appear to be priced competitively with conventional catastrophe reinsurance and comparably rated corporate bonds. CAT bonds have grown to the extent that they now play a major role in completing the market for catastrophic‐risk finance and are spreading to other lines such as automobile insurance, life insurance, and annuities. CAT bonds are not expected to replace reinsurance but to complement the reinsurance market by providing additional risk‐bearing capacity. Other innovative financing mechanisms such as risk swaps, industry loss warranties, and sidecars also are expected to continue to play an important role in financing catastrophic risk.

This article examines the potential for the U.S. insurance industry to cause systemic risk events that spill over to other segments of the economy. We examine primary indicators of systemic risk as well as contributing factors that exacerbate vulnerability to systemic events. Evaluation of systemic risk is based on a detailed financial analysis of the insurance industry, its role in the economy, and the interconnectedness of insurers. The primary conclusion is that the core activities of U.S. insurers do not pose systemic risk. However, life insurers are vulnerable to intrasector crises, and both life and property–casualty insurers are vulnerable to reinsurance crises. Noncore activities such as financial guarantees and derivatives trading may cause systemic risk, and interconnectedness among financial institutions has grown significantly in recent years. To reduce systemic risk from noncore activities, regulators need to continue efforts to strengthen mechanisms for insurance group supervision.