One argument for compulsory is that people tend to

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one argument for compulsory is that people tend to underinsure because they don’t like thinking negatively, and to mitigate moral hazard problem with government disaster relief. not super easy to decide which geographical areas require catastrophe insurance and which do not – probably would be lots of lobbying against this because it would increase cost of living. B. Postscript to Q 10: read “Insurers and Hurricane Katrina” (Item 9.3) and “Balmy in Bermuda” (Item 9.4) and answer the following:
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i. Why are reinsurance premium rates likely to rise after Katrina? because companies need to make money after many going under and others facing economic hardship. especially smaller reinsurance companies face trouble, may go under, we are in a hard market with less competition and higher premiums can be charged. reinsurers absorb extreme risk from primary insurers. Also, the supply for reinsurance decreased so the demand for catastrophe reinsurance increased ii. Should this affect automobile insurance rates in Europe as Item 9.3 implies? No, it should not increase automobile insurance rates. Raising rates because of “Katrina” is an excuse and they can only do it everyone is raising rates so there’s a lack of competition auto insurers are less reliant on reinsurers (face less risk, claims are less lumpy). although very possible that insurance company wishing to diversify would offer both auto insurance and disaster insurance or that a reinsurer and an auto insurer would be owned by the same holding company in which case the premiums might rise, but even then, that would be counter-productive unless competition was lacking and premiums everywhere were rising. iii. What should be the effect of rising reinsurance rates on the industry? What was the effect? interest rates are much higher so it is more profitable. existing insurers can’t take on more risk – lacking capital. hedge funds and private equity, firms with lots of capital entered markets. reinsurance rates going up because of supply and demand. people will be drawn to reinsurance. anyone who has capital will be drawn in. this did happen as hedge funds, private equity all sorts of firms put their funds in. this was good move because they made good profit – rates were high and claims were low. hard market (premiums increase but most types of insurances decrease) creates profit opportunity. these companies did well bc they were lucky. weren’t many hurricanes after. C. Chapter 2 discusses the advantages of purchasing insurance. The article, “Alternative Insurance: Auto-Cover,” (Item 9.1) explains why self-insurance been increasing. How do you reconcile these two different views? If company is not very risky, they are subsidizing their own risk. adverse selection from view of policy holder. may believe it is not worth it because can insure themselves by just saving money. may not believe the coverage they would receive is worth premiums.
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  • Fall '19
  • catastrophe insurance

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