An Examination of the Geographic Aggregation of Catastrophic Risk

    Authors

    R. E. Dumm; M. E. Johnson;C. C. Watson

    Comments

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    Abbreviated Journal Title

    Geneva Pap. Risk Insur.-Issues Pract.

    Keywords

    catastrophe modelling; subsidies; pooling; geographic diversification; INSURANCE; GOVERNMENT; MARKETS; Business, Finance

    Abstract

    The debate in the United States about establishing a mechanism for insuring catastrophic wind risk at the national level pre-dates the intense 2004-2005 hurricane seasons. The prevailing argument against establishing any larger risk pool is that it would create a subsidy for the higher risk exposures. To determine whether benefits do accrue by aggregating catastrophic risk across increasingly wide geographic areas, the paper uses catastrophe models to evaluate the behavior of residential property portfolios within the state of Florida and for a larger risk pool that includes multiple combinations of coastal states in the southeastern United States. We find that geographic aggregation does not inherently subsidise high-risk exposures, reduces uncertainty, and reduces required reserves relative to total exposure for the least frequent and more severe events. This finding holds true for all state combinations evaluated in this study.

    Journal Title

    Geneva Papers on Risk and Insurance-Issues and Practice

    Volume

    40

    Issue/Number

    1

    Publication Date

    1-1-2015

    Document Type

    Article

    Language

    English

    First Page

    159

    Last Page

    177

    WOS Identifier

    WOS:000346816700008

    ISSN

    1018-5895

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