An Examination of Share Price Behavior Surrounding the 2005 Hurricanes Katrina and Rita

Natural disasters can affect insurer share prices in two counterbalancing ways: (1) through the uncertainty regarding an insurer’s ability to handle loss claims and (2) through a potential increase in demand for insurance and/or increase in insurance rates. Given the historically catastrophic damage inflicted by hurricane Katrina in 2005, and the close geographic and temporal occurrence of hurricane Rita, an evaluation of insurer share price response is warranted. Our analysis shows that statistically significant reactions did occur. Insurer share prices reacted negatively to hurricane Katrina. The reaction of insurer share prices to Rita was significant, though mixed, with positive/negative results being influenced by Rita’s changing circumstances. Our study also reveals the level of underwriting exposure to be a significant determinant in the magnitude of the insurer share price reactions.