Insurer stock price responses to the creation of the California Earthquake Authority
The California Earthquake Authority (CEA) was officially created on September 27, 1996, when Governor Pete Wilson signed the necessary legislation. During the year preceding the formal creation, state lawmakers, the Insurance Commissioner, representatives of the insurance industry, and consumer groups negotiated each party's duties and financial obligations. This study analyzes the reactions of investors during the creation of the CEA. By examining eight key legislative events, we shed light on investor's perception of the effect of the legislation on the value of insurance companies. We consistently find significant positive stock price reactions in response to news favorable to the development of the CEA. We also find significant negative reactions following the release of information that is unfavorable to the development. We use a generalized least square portfolio approach and Corrado's (1989) rank statistic, a nonparametric event study methodology, to confirm our results. Finally we find that the stock market is able to discriminate between property-liability insurers with and without earthquake exposure in California.
National Association of Insurance Commissioners
Marlett, D. C., & Pacini, C. (1999). Insurer stock price responses to the creation of the California Earthquake Authority. Journal of Insurance Regulation, 18(1), 80-108.
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