Abstract

In this thesis, we examine the impact of the September 11, 2001 terrorist attacks on the risk management of insurance companies, and investigate whether these companies are more likely to use derivatives to hedge their market risk after the attack. We test whether insurer's market risk exposures are lower after 2001. We then study how the companies' market risk exposures and their use of derivatives are affected by different firm characteristics. We also survey privately owned insurers to determine the importance of derivatives in their risk management, and how they responded to the terrorist attacks. By looking at insurers' quarterly and annual market risk exposures, it is found that there is no discernible difference between property/casualty and life/health insurers during the period studied, and that the fluctuations and trend of their risk exposures are very similar. Our examination of quarterly market risk exposures shows that except for equity risk exposure which is found to be increasing, we do not have strong evidence to show that insurers' market risk exposures are lower after 2001. Although the survey results show that some users of derivatives increase their use of these hedging tools, results from a regression analysis do not show strong support for the hypothesis that insurers are more likely to hedge with derivatives after the September 11, 2001 terrorist attacks. We conclude that the terrorist attacks have prompted changes in risk management and operation strategies of some insurers, but have not increased the likelihood that insurers will use derivatives in risk management.