Natural disasters, stock price volatility in the property-liability insurance market and sustainability: An unexplored link

Abstract

The close interrelationship between sustainability and natural disasters is both bidirectional and complex, holding paramount significance within the realm of the economics of natural disasters. The ravaging effects of natural disasters extend beyond the directly affected regions, influencing sustainability and impeding recovery efforts. The aftermaths are felt across economic sectors, making it imperative to examine the financial implications, particularly for the insurance sector, a pivotal player in disaster recovery. Despite the critical role of insurance (especially property coverage), the financial repercussions for insurance companies have not received sufficient attention in the literature. Notably, there are no studies on the evolution of their stock prices, especially their volatility, in the short and medium term. Therefore, this article respond to the call made by Eckhardt et al. [60] for studies that examine the consequences of natural disasters beyond the short term, and use econometric techniques to measure them. Moreover, it focuses on a type of consequence that remains largely unexplored in the literature: the volatility of property and liability (P&L) insurers, which is closely related to sustainability. Employing a multi-event framework, we estimate the GARCH-type model that best captures the volatility behavior of P&L insurance companies in the United States over the past decade, as well as the impact of natural disasters on that volatility, in both the short and the medium term, thus going beyond the immediate effects examined in most related studies. The conclusions are of major interest to policymakers and P&L insurers, providing the former with a series of instruments to control the volatility of the returns of P&L insurers, and stock markets over different timeframes, and providing the latter with the tools needed to better manage the volatility of their stock prices and their value-at-risk.