Insurer stock price responses to the disclosure of revised insured loss estimates after the 1994 Northridge earthquake
Several studies have examined the effect of a catastrophic earthquake on the market value of property-liability (P&L) insurers. This study differs from previous ones in that it examines the market effects of revisions to estimated insured losses from the Northridge earthquake over an 18-month period. Three competing theories—the pessimistic, threshold, and hardening theories—are offered to predict and explain insurer share price reaction to estimates of insured losses. Using both a generalized least squares portfolio approach and a nonparametric event study technique (Corrado’s rank statistic), we found significant share price reactions to certain announcements. These disclosures are associated with investors’ beliefs that the Northridge earthquake led the P&L insurance industry to shift toward the upside of the underwriting cycle. However, no evidence was found to indicate that the market had either an ability or a willingness to discriminate among exposed and unexposed insurers in the aftermath of the Northridge earthquake. In short, the results provide more support for the hardening theory than for the threshold or pessimistic theories.
Western Risk and Insurance Association
Marlett, D. C., Corbett, R., & Pacini, C. (2000). Insurer stock price responses to the disclosure of revised insured loss estimates after the 1994 Northridge earthquake. Journal of Insurance Issues, 23(2), 103-123.
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