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Catastrophes and Performance in Property Insurance: A Comparison of Personal and Commercial Lines
by Patricia H. Born,
The aftermath of the natural disasters of 2005with Hurricanes Katrina, Rita, and Wilma resulting in the most expensive year for property insurers since 1906reflects this decades trend of increasing frequency and severity of losses from catastrophic events. Insurers make immediate attempts to control losses by appraising damage and investigating fraud, but risk evaluation may lead to changes in premiums, coverage levels, and exit from some markets. This ability to adapt to changes in risk is currently restricted by federal and state regulations.
Regulations are intended to protect consumers from unfair prices. However, when regulations impose restrictions on premium adjustments, insurers may choose to exit the market if they cannot maintain solvency. As a result, regulators then impose exit restrictions or cancellation bans.
The authors consider both personal and commercial insurers in their empirical analysis. Although the study is limited to an analysis of insurers underwriting performance, the authors encourage further examination of regulatory reform, such as a reform of residual market solutions, deregulation by state, and direct state subsidization of premiums for low income people, rather than disrupting market forces by keeping premiums at artificially low prices.