The Role of Government Contracts in Discretionary Reinsurance Markets for Natural Disasters

J. OF RISK AND INSURANCE, Vol. 63 No. 4, December 1996

Posted: 13 Mar 1997

See all articles by Christopher M. Lewis

Christopher M. Lewis

The Hartford

Kevin C. Murdock

McKinsey & Company and Stanford Graduate School of Business

Abstract

A recent surge in natural disaster losses in the United States has created widespread disruptions in the property insurance market and generated calls for federal protection against natural disaster risk. This article examines the market for disaster insurance in the United States and finds that insurance markets are limited in their ability to intertemporally diversify catastrophic risk. In a targeted response, this article proposes a new form of federal reinsurance based on the auctioning of multiple peril catastrophe call spread options that cover industry losses in the range of $25 - $50 billion. This article argues that the sale of these catastrophe excess-of-loss contracts utilizes the unique intertemporal diversification capabilities of the federal government to expand the market for natural disaster risk while enhancing the private market equilibrium for insurance.

JEL Classification: G13, G22, G28

Suggested Citation

Lewis, Christopher M. and Murdock, Kevin C., The Role of Government Contracts in Discretionary Reinsurance Markets for Natural Disasters. J. OF RISK AND INSURANCE, Vol. 63 No. 4, December 1996, Available at SSRN: https://ssrn.com/abstract=8183

Christopher M. Lewis (Contact Author)

The Hartford ( email )

55 Farmington Ave.
Suite 700
Hartford, CT 06105
United States
860-520-2831 (Phone)
202-327-6740 (Fax)

Kevin C. Murdock

McKinsey & Company and Stanford Graduate School of Business ( email )

21 S. Clark Street
Suite 2900
Chicago, IL 60603
United States
312-795-7286 (Phone)
253-369-2648 (Fax)

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