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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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A Framework for Linking Supply and Demand of Disaster Insurance

A Framework for Linking Supply and Demand of Disaster Insurance

(p.192) (p.193) 9 A Framework for Linking Supply and Demand of Disaster Insurance
At War with the Weather

Howard C. Kunreuther

Erwann O. Michel-Kerjan

The MIT Press

This chapter examines the effectiveness of current and alternative disaster insurance programs by looking at the demand for protection by homeowners and the supply of coverage. In particular, it explores how supply and demand interact to create a specific market equilibrium before and after a natural disaster. It considers some normative benchmarks to determine whether the market is able to balance the needs of consumers for adequate insurance coverage and the needs of investors that provide this protection. It also discusses the conditions governing the intersection of insurance demand and supply and analyzes whether the market clears at an acceptable price. The chapter shows that the capacity of insurers and reinsurers, coupled with the availability of insurance-linked securities, is a strong determinant of the supply of catastrophe insurance. It also examines the role of deductibles in determining demand and the impact of regulation on supply.

Keywords:   disaster insurance, homeowners, market equilibrium, insurance coverage, supply and demand, insurers, reinsurers, insurance-linked securities, deductibles, regulation

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