Extreme weather events, market structure and insurance market cycle in Ghana

Abstract

Purpose This study examines the effect of extreme weather events on the insurance market cycle (insurance output price and insurance availability) and the role of market structure in the extreme weather event insurance market cycle nexus. Design/methodology/approach This study uses two-stage least squares with Driscoll–Kraay standard errors for a dataset of 55 insurers from 2008 to 2022. Findings The results showed that the frequency of extreme weather events increases the insurance output price, while catastrophic losses from extreme weather events reduce insurance availability (coverage), causing a hard market using the full sample. Using the full sample, insurers’ ability to increase insurance availability upon catastrophic losses is conditioned on market power. For the life insurance market, insurers’ ability to increase insurance availability upon the occurrence of catastrophic losses is conditioned on market power but insignificant for non-life insurers. Research limitations/implications Data for the analysis is limited to the Ghanaian insurance space. Practical implications Insurance managers should strengthen their ability to price above marginal cost by enhancing cost efficiency through prudent underwriting practices and the optimisation of business processes. Social implications This has implications for insurers and regulators to adapt to evolving risks in order to ensure the stability and resilience of the insurance industry. Originality/value This study incorporates extreme weather events into traditional models of the insurance market cycle and extends the analysis by integrating insights from industrial organisation theory. In doing so, it examines the interplay between extreme weather events, market structure and the dynamics of the insurance market cycle.