Market Expectations Following Catastrophes: An Examination of Insurance Broker Returns

Abstract

We investigate the effect major catastrophes are expected to have on equilibrium price and quantity in the insurance market. In particular, we examine whether investors expect total industry revenue to increase following a disaster's shock to insurers' financial capital. Rather than examine insurers directly, we study insurance brokers, who earn commissions on premium revenue but do not pay losses following a disaster. We conduct an event study on insurance broker stock returns surrounding the 43 largest insuredloss catastrophes since 1970. We find that brokers earn positive abnormal returns on the day of the event, and that these returns are sustained following the top 20 largest events. We then investigate factors influencing these returns and find that returns are positively related to the size of the loss and negatively related to existing insurer capital. From this, we conclude that catastrophe shocks are expected to increase net industry revenue, benefiting brokers most immediately. This investor response is consistent with economic theories of a negative relationship between capital and insurance prices and price-inelastic demand for commercial insurance. . We would like to thank the two anonymous referees for their insights and suggestions. Thanks also are due to

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