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The shareholder wealth effects of insurance securitization: preliminary evidence from the catastrophe bond market

Hagendorff, Bjoern, Hagendorff, Jens ORCID: https://orcid.org/0000-0002-3567-7826 and Keasey, Kevin 2013. The shareholder wealth effects of insurance securitization: preliminary evidence from the catastrophe bond market. Journal of Financial Services Research 44 (3) , pp. 281-301. 10.1007/s10693-012-0147-x

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Abstract

Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained surprisingly low to date which raises questions over its benefits. In this paper, we examine changes in the market value of insurance and reinsurance firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution of Cat bonds to global catastrophe coverage, we do not find evidence that Cat bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we report large variations in the distribution of wealth effects in response to the issue announcement. We show that the wealth effects for shareholders in firms which issue Cat bonds appear to be driven by explanations according to which Cat bonds offer cost savings relative to other forms of catastrophe risk management (and less by the potential of Cat bonds to hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Additional Information: First published online 14 September 2012 PDF uploaded in accordance with publisher's policies at http://www.sherpa.ac.uk/romeo/issn/0920-8550/ (accessed 18.9.15).
Publisher: Springer Verlag
ISSN: 0920-8550
Date of First Compliant Deposit: 30 March 2016
Last Modified: 07 Nov 2023 00:39
URI: https://orca.cardiff.ac.uk/id/eprint/76834

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