Abstract

Catastrophe insurance differs from regular insurance in that individual claims are correlated and insurers have to pay more clients at once, which creates a liquidity strain. In this paper, I show two related findings: first, that when customers know their claims are correlated, this correlation can cause positive-sloping demand at low prices, and second, that because of this, a catastrophe insurance market can fail. Market failure is a stable equilibrium, which provides a better understanding of the frequent failures in catastrophe insurance markets.