Finance Papers

Document Type

Journal Article

Date of this Version

9-2015

Publication Source

The Journal of Risk and Insurance

Volume

82

Issue

3

Start Page

505

Last Page

530

DOI

10.1111/jori.12031

Abstract

Since the passage of the Terrorism Risk Insurance Act of 2002, corporate terrorism insurance is sold as a separate policy from commercial property coverage. In this article, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique data set of insurance policies purchased by large U.S. firms, combined with financial information of the corporate clients and of the insurance provider, we apply a two-stage least squares approach to obtain consistent estimates of premium elasticity of corporate demand for property and terrorism coverage. Our findings suggest that both are rather price inelastic and that corporate demand for terrorism insurance is significantly more price inelastic than demand for property insurance. We further find a negative relation between the solvency ratios of both property and terrorism risk coverage, with a stronger effect on the latter, indicating that companies use their ability to self-insure as a substitute for market insurance. Our results are robust to the application of alternative estimators as well as changes in the econometric specifications.

Copyright/Permission Statement

This is the peer reviewed version of the following article: Michel-Kerjan, E., Raschky, P. and Kunreuther, H. (2015), Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets. Journal Risk and Insurance, 82: 505–530. doi:10.1111/jori.12031, which has been published in final form at http://dx.doi.org/10.1111/jori.12031. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms].

Embargo Date

11-18-2017

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Date Posted: 27 November 2017

This document has been peer reviewed.