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Nondiversification traps in catastrophe insurance markets

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Title: Nondiversification traps in catastrophe insurance markets
Authors: Ibragimov, R
Jaffee, D
Walden, J
Item Type: Journal Article
Abstract: We develop a model for markets for catastrophic risk. The model explains why insurance providers may choose not to offer insurance for catastrophic risks and not to participate in reinsurance markets, even though there is a large enough market capacity to reach full risk sharing through diversification in a reinsurance market. This is a “nondiversification trap.” We show that nondiversification traps may arise when risk distributions have heavy left tails and insurance providers have limited liability. When they are present, there may be a coordination role for a centralized agency to ensure that risk sharing takes place.
Issue Date: 1-Mar-2009
Date of Acceptance: 1-Mar-2008
URI: http://hdl.handle.net/10044/1/67783
DOI: https://dx.doi.org/10.1093/rfs/hhn021
ISSN: 0893-9454
Publisher: Oxford University Press (OUP)
Start Page: 959
End Page: 993
Journal / Book Title: Review of Financial Studies
Volume: 22
Issue: 3
Copyright Statement: © 2008 The Author. This is a pre-copy-editing, author-produced version of an article accepted for publication in The Review of Financial Studies following peer review. The definitive publisher-authenticated version, Volume 22, Issue 3, 1 March 2009, Pages 959–993, is available online at: https://dx.doi.org/10.1093/rfs/hhn021
Keywords: Social Sciences
Business, Finance
Economics
Business & Economics
DISTRIBUTIONS
EARTHQUAKES
DIVERSIFICATION
UNCERTAINTY
BEHAVIOR
LOSSES
PRICES
RISK
1402 Applied Economics
1502 Banking, Finance And Investment
1401 Economic Theory
Finance
Publication Status: Published
Online Publication Date: 2008-03-29
Appears in Collections:Imperial College Business School