Sadati, Akram Sadat (2024) Exploring the Impact of Natural Disasters on U.S. Insurance Companies: An Empirical Analysis. Masters thesis, Concordia University.
Preview |
Text (application/pdf)
950kBSadati_MSc_F2024.pdf - Accepted Version Available under License Spectrum Terms of Access. |
Abstract
In this study, we investigate the impact of natural disasters on the stock prices of U.S.
insurance companies from 2010 to 2022. Using a sample of hurricanes, wildfires, and
tornadoes, we conduct an event study to analyze the market reactions to these events and
examine why some insurance firms are more affected than others. Our findings indicate that
natural disasters tend to result in negative abnormal returns for insurance firms, with stock
prices dropping significantly around the events. Yet, the price declines are followed by a brief
recovery period after the disaster has ended. The study highlights key factors affecting
insurers’ market performance during such events: firms with higher leverage, lower net
income, and a lower market valuation perform worse than their respective counterparts.
Additionally, we find that disasters with large insured damage amounts as well as hurricanes
invoke larger negative market reactions. Furthermore, we observe that natural disasters have
a significant impact on an insurer’s accounting performance. Specifically, disasters cause a
significant decline in an insurer’s Return on Assets (ROA), with variations based on the
insured damages stemming from a disaster and the insurer’s ex-ante financial performance.
Divisions: | Concordia University > John Molson School of Business > Finance |
---|---|
Item Type: | Thesis (Masters) |
Authors: | Sadati, Akram Sadat |
Institution: | Concordia University |
Degree Name: | M. Sc. |
Program: | Finance |
Date: | 6 August 2024 |
Thesis Supervisor(s): | Walker, Thomas |
Keywords: | Natural disasters, Insurance companies, Cumulative abnormal returns (CAR)s, Event Study, Market reactions |
ID Code: | 994388 |
Deposited By: | Akram Sadat Sadati |
Deposited On: | 24 Oct 2024 17:28 |
Last Modified: | 24 Oct 2024 17:28 |
References:
Alexander, K. (2014). Stability and Sustainability in Banking Reform: Are Environmental Risks Missing in Basel III? https://doi.org/10.5167/UZH-103844Andrew, V., Careen, A. and Nick, R. (2015), Banking and Sustainability: Time for Convergence, Cambridge Institute for Sustainability Leadership, Cambridge.
Batten, S., Sowerbutts, R. and Tanaka, M. (2016), Let’s Talk about the Weather: The Impact of Climate Change on Central Banks, Staff Working Paper No. 603, The Bank of England. http://dx.doi.org/10.2139/ssrn.2783753
Benali, N., & Feki, R. (2017). The impact of natural disasters on insurers’ profitability: Evidence from property/casualty insurance companies in the United States. Research in International Business and Finance, 42, 1394–1400. https://doi.org/10.1016/j.ribaf.2017.07.078
Benson, C., & Clay, E. (2003). Economic and financial impacts of natural disasters: an assessment of their effects and options for mitigation: synthesis report. Overseas Development Institute, London.
Born, P. H., & Klimaszewski-Blettner, B. (2013). Should I stay or should I go? The impact of natural disasters and regulation on U.S. property insurers’ Supply Decisions. Journal of Risk and Insurance, 80(1), 1–36. https://doi.org/10.1111/j.1539-6975.2012.01477.x
Born, P., & Viscusi, W. K. (2006). 4- The catastrophic effects of natural disasters on the insurance markets. Journal of Risk and Uncertainty, 33(1–2), 55–72. https://doi.org/10.1007/s11166-006-0171-z
Botzen, W. J. W., & Van Den Bergh, J. C. J. M. (2008). 3- Insurance against climate change and flooding in the Netherlands: Present, future, and comparison with other countries. Risk Analysis, 28(2), 413–426. https://doi.org/10.1111/j.1539-6924.2008.01035.x
Bouwer, L. M., & Vellinga, P. (2005). Some rationales for risk sharing and financing adaptation. Water Science and Technology, 51(5), 89–95. https://doi.org/10.2166/wst.2005.0116
Brahmana, R., Hong Puah, C. and Chai, M. (2016), “Natural disasters and local bank non-performing loans: the case of the Nias Tsunami 2004”, Economics Bulletin, Vol. 36 No. 4, pp. 2413-2421.
Collier, B., Miranda, M. and Skees, J. (2013), Natural Disasters and Credit Supply Shocks in Developing and Emerging Economies, University of Kentucky Doctoral Dissertation.
Cortés, K. R., & Strahan, P. E. (2017). Tracing out capital flows: How financially integrated banks respond to natural disasters. Journal of Financial Economics, 125(1), 182-199. https://doi.org/10.1016/j.jfineco.2017.04.011
CRED – Centre for Research on the Epidemiology of Disasters (2016), “The EM-DAT higher resolution disaster data”, CRED Crunch No, Vol. 43, July, pp. 1-2.
Duqi, A. (2023). The Consequences of Natural Disasters on Banking Institutions. In Banking Institutions and Natural Disasters: Recovery, Resilience and Growth in the Face of Climate Change (pp. 31-58). Cham: Springer Nature Switzerland.
Gramlich, D., Walker, T., Zhao, Y., & Bitar, M. (2023). After the storm: Natural disasters and bank solvency. International Journal of Central Banking, 19(2), 199-249.
Gupta, A., Owusu, A., & Wang, J. (2023). Assessing US insurance firms' climate change impact and response. The Geneva Papers on Risk and Insurance-Issues and Practice, 1-34.
Hagendorff, B., Hagendorff, J., & Keasey, K. (2015). The impact of mega-catastrophes on insurers: an exposure-based analysis of the U.S homeowners’ insurance market. Risk Analysis, 35(1), 157–173. https://doi.org/10.1111/risa.12252
Kalfin, Sukono, Supian, S., & Mamat, M. (2022). Insurance as an alternative for sustainable economic recovery after natural disasters: A systematic literature review. Sustainability, 14(7), 4349. https://doi.org/10.3390/su14074349
Keerthiratne, S., & Tol, R. S. (2017). Impact of natural disasters on financial development. Economics of Disasters and Climate Change, 1(1), 33-54.
Klomp, J. (2014). Financial fragility and natural disasters: An empirical analysis. Journal of Financial stability, 13, 180-192. https://doi.org/10.1016/j.jfs.2014.06.001
Kousky, C. (2019). The role of natural disaster insurance in recovery and risk reduction. Annual Review of Resource Economics, 11(1), 399-418. https://doi.org/10.1146/annurev-resource-100518-094028
Kunreuther, H., & Michel-Kerjan, E. (2007). Climate Change, Insurability of Large-scale Disasters and the Emerging Liability Challenge. Nber Working Paper w12821. National Bureau of Economic Research. https://doi.org/10.3386/w12821
Kunreuther, H., & Pauly, M. (2006). Rules rather than discretion: Lessons from Hurricane Katrina. Journal of Risk and Uncertainty, 33(1), 101–116. https://doi.org/10.1007/s11166-006-0173-x
Liargovas, P., & Repousis, S. (2011). The impact of mergers and acquisitions on the performance of the Greek banking sector: An event study approach. International Journal of Economics and Finance, 3(2), 89-100.
Mills, E. (2005). Insurance in a climate of change. Science, 309, 1040–1044.
Mills, E. (2009). A global review of insurance industry responses to climate change. The Geneva Papers on Risk and Insurance - Issues and Practice, 34(3), 323–359. https://doi.org/10.1057/gpp.2009.14
Newkirk, R. T. (2001). The increasing cost of disasters in developed countries: A Challenge to Local Planning and Government. Journal of Contingencies and Crisis Management, 9(3), 159–170. https://doi.org/10.1111/1468-5973.00165
Noth, F., & Schüwer, U. (2023). Natural disasters and bank stability: Evidence from the US financial system. Journal of Environmental Economics and Management, 119, 102792. https://doi.org/10.1016/j.jeem.2023.102792
Noy, I. (2009), “The macroeconomic consequences of disasters”, Journal of Development Economics, Vol. 88 No. 2, pp. 221-231. https://doi.org/10.1016/j.jdeveco.2008.02.005
Noy, I., and duPont IV, W. (2016). The long-term consequences of natural disasters—A summary of the literature.
OECD, The World Bank and UN Environment (2018), Financing Climate Futures: Rethinking Infrastructure, OECD Publishing, Paris.
Stechemesser, K., Endrikat, J., Grasshoff, N., & Guenther, E. (2015). Insurance companies’ responses to climate change: Adaptation, dynamic capabilities and competitive advantage. The Geneva Papers on Risk and Insurance-Issues and Practice, 40, 557-584.
Steindl, F.G. and Weinrobe, M.D. (1983), “Natural hazards and deposit behavior at financial institutions: a note”, Journal of Banking and Finance, Vol. 7 No. 1, pp. 111-118. https://doi.org/10.1016/0378-4266(83)90059-6
Smolka, A. (2006). Natural disasters and the challenge of extreme events: risk management from an insurance perspective. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 364(1845), 2147-2165. https://doi.org/10.1098/rsta.2006.1818
Sturm, T., & Oh, E. (2010). Natural disasters as the end of the insurance industry? Scalar competitive strategies, alternative risk transfers, and the economic crisis. Geoforum, 41(1), 154-163. https://doi.org/10.1016/j.geoforum.2009.09.010
Tol, R. S. J. (2009). The economic effects of climate change. Journal of economic perspectives, 23(2), 29-51.
Von Peter, G., Von Dahlen, S. and Saxena, S.C. (2012), Unmitigated Disasters? New Evidence on the Macroeconomic Cost of Natural Catastrophes, BIS Working Paper No. 394, Bank for International Settlements, Basel.
Von Ungern-Sternberg, T. (2009). Hurricane Insurance in Florida. Université de Lausanne, DEEP.
Wang, L., & Kutan, A. M. (2013). The impact of natural disasters on stock markets: Evidence from Japan and the US. Comparative Economic Studies, 55, 672-686.
Walker, T., Xu, Y., Gramlich, D., & Zhao, Y. (2023). The impact of natural disasters on the performance and solvency of US banks. International Journal of Managerial Finance, 19(1), 136–154. https://doi.org/10.1108/IJMF-08-2020-0406
World Bank (2013), Building Resilience: Integrating Climate and Disaster Risk into Development. Lessons from World Bank Group Experience, The World Bank, Washington, DC.
World Bank (2016), Natural Disasters Force 26 Million People into Poverty and Cost $520bn in Losses Every Year, New World Bank Analysis Finds [Press Release], The World Bank, Washington, DC, available at: https://www.worldbank.org/en/news/press-release/2016/11/14/natural-disasters-force-26-million-people-into-poverty-and-cost-520bn-in-losses-every-year-new-world-bank-analysis-finds
Repository Staff Only: item control page