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At War with the WeatherManaging Large-Scale Risks in a New Era of Catastrophes$
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Howard C. Kunreuther and Erwann O. Michel-Kerjan

Print publication date: 2009

Print ISBN-13: 9780262012829

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262012829.001.0001

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Private Insurers’ Decision Making for Supplying Coverage

Private Insurers’ Decision Making for Supplying Coverage

(p.128) (p.129) 6 Private Insurers’ Decision Making for Supplying Coverage
At War with the Weather

Howard C. Kunreuther

Erwann O. Michel-Kerjan

The MIT Press

This chapter considers how insurers and reinsurers decide whether to cover a risk and what premiums to charge. The recent catastrophes have forced insurers and reinsurers to reevaluate their ability to provide protection against wind damage from hurricanes and to determine whether these events are insurable. To understand the concept of insurability, one may look at a standard policy whereby insurance premiums are paid at the beginning of a given time period to cover losses during this interval (typically a year). Premiums tend to be higher if the manner of estimating the likelihood and consequences of a risk is ambiguous. The unpredictability and significant losses associated with catastrophes mean that insurers must spend more for insurance coverage to cover the losses in the tail of the probability distribution. Although catastrophes are generally considered low-probability, high-consequence events, they might be much more frequent than in the past.

Keywords:   insurers, reinsurers, catastrophes, hurricanes, wind damage, insurability, insurance premiums, risk, insurance coverage

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