CATASTROPHE INSURANCE, CAPITAL-MARKETS, AND UNINSURABLE RISKS

This article addresses the question why private insurance companies in the United States are not willing to provide insurance against catast rophic events (such as earthquakes, hurricanes, and floods). One expec ts such a market to exist, since the demand for catastrophe insurance is high and the traditional reasons for risks to be ''uninsurable'' (s uch as moral hazard) are not present. We argue that catastrophic risks require insurers to hold large amounts of liquid capital, but institu tional factors (accounting, tax, and takeover risk) make insurers relu ctant to do this. In other words, the basic problem rests in the capit al markets, not in the insurance markets. Instruments such as Act of G od bonds and catastrophe futures and options contracts are being devel oped to solve the problem. Nevertheless, it appears that the governmen t will continue to be an essential player in catastrophe insurance mar kets.