Effects of Natural Disasters on Non-Life Insurance

This study examines the non-linear relationship between the damage value of natural disasters and the size of non-life insurance markets in50 countries from 2000-2014. Specifically, this study applies Hansen's [4] panel regression with threshold effects, which permits the effects of an increase in the disaster damages on the insurance market to be different for countries with high and low value of damages. The results indicate a single threshold at the damage value of USD 479,260.71 separating the regression into two regimes. For countries with the damage value higher than the threshold, the higher risk of natural disaster damages has no statistically significant effect on the non-life insurance market size. For countries with the damage value lower than the threshold, however; the higher risk of natural disaster damages has a significant negative effect on the non-life insurance market size. The results in both regimes reflect the inadequate response of the insurance industry to the higher risk of natural disaster. The insufficient insurance can lead to a distress to people affected and a higher burden for the government to provide disaster reliefs. The underinsured situation occurs as a result of problems in both the demand and supply sides of the insurance market. For the demand side, education and information are needed to raise people awareness of the increase in the risk and the importance of damage prevention and risk management. For the supply side, risk diversification for natural disaster damages can be complex, especially for infrequent but severe events in countries with small insurance markets.