The Impact of the September 11 Terrorist Attack on the ... · PDF fileThe Impact of the September 11 Terrorist Attack on the Global ... Starks, 2003; Wang and Corbett, 2008; Chen,

The Impact of the September 11 Terrorist Attack on the Global Insurance Markets: Evidence from the Japanese Property-Casualty Insurance Industry

Noriyoshi Yanase1 and Yukihiro Yasuda2

Abstract: We investigate the significant effects of the September 11 attacks on theJapanese stock market, one of the largest markets in the world. Although severalstudies have examined the impact of the attacks on the domestic U.S. stock market,few studies have analyzed their impact on the foreign insurance industry throughglobally well-developed reinsurance transactions. Surprisingly, a mid-sized P/Cinsurance company, TAISEI Fire and Marine Insurance, went bankrupt on November22, 2001, two months after the events, due to massive reinsurance claims arising fromthe terrorist attacks. Using traditional event study methodology for both events, theattacks and the failure, we find that the Japanese stock market reacted to risks of theterrorism event through the global reinsurance market at the time of TAISEI’s failure,rather than immediately after the events of September 11. [Key words: Japaneseinsurance market; reinsurance; terrorist attacks.]

INTRODUCTION

he sudden and massive series of terrorist attacks on September 11, 2001had an enormous impact on the global insurance industry.3 We inves-

tigate the significant effects of the September 11 attacks on the Japanese

1Associate Professor of Insurance, Faculty of Business Administration, Tokyo Keizai Univer-sity and Visiting Research Professor, Department of Finance, Moore School of Business,University of South Carolina. [email protected] Professor of Finance, Faculty of Business Administration, Tokyo Keizai University.3In fact, the World Trade Center towers were covered directly by several major insurers andreinsurers around the world.

T

85Journal of Insurance Issues, 2010, 33 (1): 85–107.Copyright © 2010 by the Western Risk and Insurance Association.All rights reserved.

86 YANASE AND YASUDA

stock market, one of the world’s largest foreign markets. Although severalstudies have examined the impact of the attacks on the domestic U.S. stockmarket (e.g., Cummins and Lewis, 2003; Doherty, Lamm-Tennant, andStarks, 2003; Wang and Corbett, 2008; Chen, Doerpinghaus, Lin, and Yu,2008), there have been few studies that analyzed the impact on the foreigninsurance industry through the globally well-developed system of reinsur-ance transactions.

Surprisingly, a mid-sized property and casualty (P/C) insurance com-pany, TAISEI Fire and Marine Insurance (TAISEI), went bankrupt onNovember 22, 2001, two months after the events, due to massive reinsur-ance claims arising from the terrorist attacks. TAISEI’s failure provided anopportunity to enhance the regulation of reinsurance in Japan. In fact, theFinancial Services Agency of Japan (FSA) decided to amend the guidelinesof Insurance Business Law to strengthen the regulations for reinsurancetransactions. It is absolutely critical for stockholders, policyholders, regu-lators, and other stakeholders to know how the disclosure system forreinsurance transactions should be organized. Therefore, the first steptoward discussing this issue is to examine how a catastrophic event in onecountry can affect other nations’ insurance industries.

There are no studies focusing on the effects of the terrorist attacks onstock prices of the foreign insurance companies in Japan, European Union(EU) member nations, and others, even though there are some importantprevious studies examining the terrorist attacks’ impact on the U.S. insur-ance industry. Using the traditional event study methodology for bothevents—the terrorist attacks (September 12, 2001 in Japan time) and TAI-SEI’s failure (November 22, 2001 in Japan time)—we explore the timing ofthe Japanese stock market’s reaction to the risks of the terrorist eventthrough the global reinsurance market. Our results demonstrate that theJapanese stock market reacted to the risks of the terrorist event through theglobal reinsurance market when TAISEI’s failure occurred, not immedi-ately after the event on September 11. As far as we know, this study is thefirst that focuses on how the terrorist attacks affected foreign insuranceindustries. The remainder of the paper is organized as follows: Section 2provides the background of our study. The literature review is in Section3, and Section 4 describes the data, methodology, and hypotheses. Section5 presents the empirical results, and the final section concludes.

BACKGROUND

According to Swiss Re (2002), the property and business interruptionlosses arising from the terrorist attacks were estimated at USD $19 billion,

THE IMPACT OF SEPTEMBER 11 ON GLOBAL INSURANCE MARKETS 87

which was one of the largest man-made insurance losses in world history.4

Therefore, it has been proposed that the terrorist attacks of September 11had a major impact on the stock prices of U.S. insurance companies. Moreimportantly, the catastrophic losses of just one country, such as the terroristattacks in the United States, could suddenly spread throughout the globalinsurance industry because the global network of reinsurance markets hasgrown remarkably in recent years. Moreover, the speed of communicationthrough the global reinsurance network, which has also improved with therapid development of information technologies,5 might affect the speed ofthe impact upon other nations’ insurance industries.

Therefore, the damage stemming from the terrorist attacks couldspread to many insurance companies around the world.6 In fact, the stockprices of the insurance companies on the Tokyo Stock Exchange (TSE) andmost of the European stock markets plunged immediately after the U.S.terrorism event. For example, shares of all the P/C insurance companieslisted on the TSE fell an average of 7.59% in one day.7 Figure 1 shows therate of change on closing prices for all the listed P/C insurance companiesin Japan at the time of the terrorist attacks.

Sometimes it is difficult even for insiders, such as management exec-utives, to understand the details of reinsurance transactions. Clearly, it hasalso been recognized that reinsurance transactions are too complicated foroutsiders, such as shareholders and regulators, to have an accurate under-standing of the complete picture.8 Global reinsurance transactions seem

4Furthermore, the additional losses related to the attacks were an estimated 16.5–39 billion(USD) because the insurance industry had covered not only property but also liability andlife insurance.5Although the development of the global reinsurance market has a disadvantage that riskexposure because of catastrophic events could spread quickly around the world, it has alsogiven individual insurance companies an advantage in that insurance companies are able toengage effectively in risk management activity.6The Wall Street Journal staff reporter Christopher Oster reported, “Most of the major rein-surers in the world are going to feel a substantial impact. Reinsurance companies essentiallyprovide insurance to the primary sellers of coverage, sharing risk on policies. Some expertsestimated that as many as 100 insurers ultimately will share the cost.” (Wall Street Journal,Sep. 12, 2001, p. B.1)7The following twelve P/C insurance companies were listed in the TSE on September 11:TAISEI, NISSAN, AIOI, NISSAY-DOWA, NISSHIN, SUMITOMO, TOKYO-MARINE,MITSUI, NICHIDO, YASUDA, NIPPON-KOA, and FUJI.8Some comments by stock analysts were reported just after the attacks. One analyst said,“The effects of the attacks on the Japanese P/C insurance companies were not seriousbecause the insurers were expected to underwrite the risks arising from the attacks.” In fact,many P/C insurance sector analysts were more concerned about serious effects fromtyphoons at that time (Nikkei Financial Newspaper, Tokyo, Japan, Sep. 14, 2001, p. 20).


like a “black box” to outsiders.9 According to Figure 1, although the closingprices of all the P/C insurance companies dropped sharply immediatelyfollowing the attacks, those prices were trending upward again within afew days after the event. The outsiders, most of the market players on theTSE, seemed to believe that no significant damages would be imposed onJapanese P/C insurance companies as a result of the attacks at that pointin time.

Even the insiders, the executive managers of the insurance companies,seemed to believe that their companies had not been significantly damagedas a result of the attacks immediately thereafter.10 For example, althoughAIOI General Insurance (AIOI) announced that its maximum potential loss

9The maximum amount of losses caused by the attacks was expected to be only about 10 bil-lion (JPY) industry-wide just after the attacks (Nikkei Financial Newspaper, Tokyo, Japan, Sep.20, 2001, p. 6). Contrary to the above original forecast, the General Insurance Association ofJapan (GIAJ), a trade association representing licensed general insurance companies,announced the actual losses ended up at about 132.8 billion (JPY) industry-wide at the endof the semiannual financial settlement of fiscal year 2001 just after TAISEI’s failure. Further,the eventual losses exceeded the estimation by GIAJ at the end of March 2002 (the end of fis-cal year 2001) as we will see later.

Fig. 1. Rate of change on closing prices (All listed P/C insurance companies).


was about 800 million JPY on September 17, 2001, AIOI recorded 138.7billion JPY as its total related cost of the attacks at the end of March 2002,the end of fiscal year 2001.11 The huge difference between the originalexpected losses and the final actual losses suggests that even industryinsiders like executive managers did not initially understand the potentialeffects of the attacks on the Japanese P/C insurance companies throughreinsurance arrangements.

Surprisingly, two months after the attacks, on November 22, a mid-sized P/C insurance company, TAISEI, became insolvent, with 74.4 billionJPY in reinsurance claims arising from the terrorist attacks in the UnitedStates, and filed with the court for protection from creditors under thespecial rehabilitation law.12 As noted previously, shortly after the attacks,most Japanese P/C insurance companies had announced that their lossescaused by the terrorist attacks were not serious, and they did not seem tohave significant exposure in the aftermath of the attacks. It appears thatTAISEI’s sudden collapse and bankruptcy filing due to reinsurance trans-actions two months after the event was the first time that Japanese P/Cinsurance companies recognized that catastrophic losses stemming fromthe terrorist attacks were in fact affecting their own industry.

It should be noted that TAISEI’s failure revealed that two Japanese P/C insurance companies, NISSAN Fire and Marine Insurance (NISSAN) andAIOI, confronted huge exposures in aviation reinsurance through themediation of Fortress Re, a privately owned reinsurance underwritingmanager in the United States. Following TAISEI’s failure, NISSAN andAIOI urgently announced that they would have to pay reinsurance claimsand would fall deeply into the red for the fiscal year because Fortress Rehad pooled the funds of these companies to share the risks of reinsuringaviation portfolios, causing these companies significant aviation reinsur-ance exposure at that time.13 Even with those announcements, however,most stakeholders in the Japanese P/C insurance industry failed to fully

10TOKYO MARINE released their estimate that the maximum amount of losses caused bythe attacks was 1 billion JPY on September 12. Moreover, the other major P/C insurancecompanies, MISTUI, SUMITOMO, YASUDA, NIPPON-KOA, NISSAY-DOWA, and AIOI,announced that their maximum amount of losses were, respectively, 1.5 billion JPY, 500 mil-lion JPY, 2 billion JPY, 500 million JPY, and 800 million JPY before September 20.11According to the formal announcement by AIOI at the end of fiscal year 2001 (the end ofMarch 2002), the net claim paid was 32.2 billion JPY, and the reserve for outstanding claimswas 106.4 billion JPY.12TAISEI’s failure was one of only two bankruptcies in the Japanese P/C insurance industrysince World War II. Therefore, the bankruptcy had a great impact on the Japanese P/C insur-ance industry.


comprehend the actual amount of risk exposure the entire insurance indus-try faced through the global reinsurance market.

In response to this apparent failure of the reinsurance system, thepublic’s concern over the lack of transparency of reinsurance transactionsand the absence of high-quality disclosure has been growing.14 Insuranceregulators also have recognized the necessity for tighter regulation ofreinsurance transactions because investors need greater transparency inthe reinsurance transactions or high-quality disclosure of the reinsurancerisks. As mentioned before, TAISEI’s failure provided an opportunity toenhance the regulation of reinsurance. After some discussion, the FSAdecided to amend the guidelines of Insurance Business Law to strengthenthe regulations for reinsurance transactions. The new guidelines requireinsurers to disclose the details of reinsurance premiums, policy reserves,reserves for outstanding pending claims, and their risk management pol-icy. Eventually, this new regulation was enforced for all Japanese insurancecompanies after fiscal year 2004. The concern with reinsurance disclosurealso has grown worldwide, especially after the catastrophic terrorist event.The International Association of Insurance Supervisors (IAIS), the interna-tional organization representing insurance regulators and supervisorsaround the world, has discussed how regulation for the global reinsurancemarket should function because the recent reinsurance transactionsinvolve all the global insurance markets.15

LITERATURE REVIEW

Over the past years, a considerable number of studies have been madeon the impact of catastrophic events on capital markets. Baginski, Corbett,and Ortega (1991) examine the capital market response to the catastrophic

13NISSAN announced that the claims paid related to the terrorist attacks were estimated at74.4 billion JPY just after TAISEI's failure. AIOI also announced that the total related cost ofthe attacks was expected to be between 80 and 100 billion JPY. As we mentioned before,however, the costs to AIOI eventually reached up to 138.7 billion JPY at the end of the fiscalyear.14In September 2003, the GIAJ announced they would strengthen disclosure and account-ability of reinsurance transactions as much as possible, although it is quite difficult to obtaina clear picture of reinsurance transactions.15The secretary general of IAIS, Dr. Yoshihiro Kawai, referred to the standards and transpar-ency of the global reinsurance market in the Standards Setting Activities in February 2004 asfollows: “There are two dynamic developments in the area of reinsurance. One is in settingstandards and the other is in enhancing disclosure and transparency in the reinsurance sec-tor. Both are regarded as key areas not only by insurance supervisors but also by the interna-tional financial community in general.”


event of the MGM Grand fire and the announcement of MGM Grand’spurchase of $170 million in retroactive liability insurance. They find thatnews of the fire had an adverse effect on MGM’s stock price. Shelor,Anderson, and Cross (1992) examine the market response of property-liability insurers to the Loma Prieta earthquake, and they find positiveabnormal returns for property and liability insurers after the earthquake,indicating that investor expectations of a higher demand for insurance mayhave more than offset the potential earthquake losses. In fact, their researchis based upon two opposing hypotheses regarding such catastrophic losses.One hypothesis is that the rapid depletion of surplus accounts fostered bycatastrophic events causes investors to discount insurance firm stock val-ues. The other hypothesis is that insurers benefit from an isolated cata-strophic event because of subsequent increased demand.16 Since Shelor,Anderson, and Cross (1992), several important studies have investigatedwhich hypothesis is empirically supported.

Contrary to the findings of the Shelor et al. study, Lamb (1995) findsthat Hurricane Andrew produced a significant negative stock price reac-tion on property-liability insurers with direct premiums written in Floridaor Louisiana, indicating that the market efficiently interpreted the infor-mation about the effects of the hurricane and discriminated among prop-erty-liability insurers on the basis of the existence and magnitude ofinsurance written.

Although several studies have been made on the impact of cata-strophic events on the U.S. capital market, little is known about how acatastrophic event might affect foreign capital markets. Yamori andKobayashi (2002) is the first and only study to test the previously men-tioned hypothesis using a case outside the United States. Yamori andKobayashi investigate how the Japanese stock market reassessed domesticinsurance company values after the catastrophic event of the 1995 Han-shin–Awaji earthquake, finding negative stock price reactions.

In recent years, the impact of man-made catastrophic events on stockmarkets has been shockingly brought to academic attention by the terroristattacks of September 11.17 Cummins and Lewis (2003) examine the impactof several catastrophic events: the terrorist attack, the Northridge earth-quake, and Hurricane Andrew. They find not only a strong negative impacton insurer stock prices immediately following these catastrophic eventsbut also different reactions of the financially strong firms from those of thefinancially weaker firms, indicating the “flight to quality” phenomenon.

16According to Chen, Doerpinghaus, Lin, and Yu (2008), the former hypothesis is called the“Claim Effect” in the short term, and the latter hypothesis is called the “Growth Effect” inthe long term.


Their empirical implication of the “flight to quality” predictions is thatstronger insurers should sustain a smaller negative impact from the terror-ist attacks than financially weaker insurers. In other words, although theimmediate effect of the attacks was a general decline in insurance stockprices, they find that the stock prices of insurers with strong financialratings rebounded while those of weaker insurers did not during the periodafter the first post-event week. Doherty, Lamm-Tennant, and Starks (2003)examine the same issues in terms of capacity constraints and markettransparency. Wang and Corbett (2008) examine whether the market reac-tions are different between two groups, property and liability insurers andlife and health insurers, finding that stocks of property and liability insur-ers do generate much larger abnormal returns than those of life and healthinsurers.

Most recently, Chen, Doerpinghaus, Lin, and Yu (2008) investigatethe effect on insurers of both the large unexpected losses experienced inthe short term and the long-run potential growth opportunities for insur-ers due to supply reduction and potential risk updating following theterrorist attacks. Unlike previous studies, they find the respective effectsseparately for short-term negative and long-term positive impacts on thestock market, using the data of short-term and long-term abnormalforecast revisions. Although several important studies have been con-ducted on the impact of catastrophic events on the local capital market,little attention has been focused on the impact on foreign capital marketsthrough the global reinsurance networks. Therefore, the global impact ofcatastrophic events, such as the terrorist attacks of September 11, needsto be examined in detail. To our best knowledge, this is the first study toexamine how the catastrophic event (the terrorist attacks) affected aforeign insurance market, the Japanese P/C insurance market in partic-ular. Table 1 summarizes the relationship between our research approachand the previous studies.

17In the U.S. academic context, the impact of the Terrorism Risk and Insurance Act of 2002(TRIA) is also an important issue. Because insurance companies began to exclude the terror-ism risk from their coverage after the terrorist attacks, several companies were faced with aconstraint of their insurance management. In response to this trend, the U.S. governmentpassed TRIA in November 2002, to protect against the impact of terrorist attacks on the busi-nesses. Under the new law, while insurance companies are required to underwrite terrorismcoverage, the government provides the insurance industry with some protection throughgovernment reinsurance. Marlett, Griffith, Pacini, and Hoyt (2003) find significant stockprice changes after the passing of TRIA, showing that stock prices adjusted to perceivedeffects of the legislative process.


DATA, METHODOLOGY, AND HYPOTHESES

Data and Methodology

The book value data used in this study are obtained from the annualspecial issues of “The Statistics of Japanese Non-Life Insurance Business”published by the Insurance Research Institute of Japan, and stock data areobtained from The Nikkei Economic Electronic Databank System (NEEDS).We examine three groups of Japanese P/C insurance companies listed onthe TSE between the end of fiscal year 2000 and the end of fiscal year 2001.18

The first group consists of AIOI and NISSAN (Re-Ins Gr.). As we mentionedbefore, AIOI and NISSAN, as well as TAISEI, were closely related throughtheir reinsurance contracts through the mediation of Fortress Re, a U.S.reinsurance underwriting manager. Because Fortress Re had pooled thefunds of these companies to share the risks of reinsuring aviation portfo-lios, AIOI and NISSAN both faced the problem of enormous payments ofreinsurance from the attacks. The second group consists of YASUDA Fireand Marine Insurance (YASUDA) and NISSAN, which were supposed tomerge with TAISEI into a new insurance company, Sompo Japan Insurance(Sompo Japan). Although these companies—YASUDA, NISSAN, and TAI-SEI—had already announced, before the terrorist attacks occurred, a sched-ule to merge by April 2002, TAISEI’s failure forced them to rethink their

18The Japanese business year starts in April and ends in March, meaning the end of fiscalyear 2000 (2001) is the end of March 2001 (2002).

Table 1. Previous Research and Our Research Position

The event hasan effect on:

Catastrophic loss event from:

United States Other countries

United States

Baginski, Corbett, and Ortega (1991)

Doherty, Lamm-Tennant, and Starks (2003)

Shelor, Anderson, and Cross (1992)

Wang and Corbett (2008)

Lamb (1995) Chen, Doerpinghaus, Lin, and Yu (2008)

Cummins and Lewis (2003)

Other countries Our research

Yamori and Kobayashi (2002)


schedule for the merger19. We set up the second group (SJ Gr.) to controlfor the effect of the merger on the stock price. The third group consists ofall of the P/C insurers listed on the TSE, which we use as a benchmark inour study. Note that two of the groups (Re-Ins Gr. and SJ Gr.) contain thesame firm (NISSAN); the pure effect of TAISEI’s failure on Re-Ins Gr. (orSJ Gr.) is respectively observed in the sample containing just AIOI (orYASUDA), which is a limitation of our analysis resulting from this smallsample. Therefore, by investigating the reactions of the stock prices notonly of these three groups but also of the two insurers (AIOI and YASUDA),we examine whether the effects of TAISEI’s failure are the same for otherinsurers.

We test these impacts by conducting an event study of the stocks andcomparing the magnitude of the effect on the groups (e.g., Mackinlay,1997). The event days are September 12 and November 22. The former dayis the immediate aftermath of the terrorist attacks, and the latter day is thepublic announcement day of TAISEI’s failure. The market regression coef-ficients were estimated using the Tokyo Stock Price Index (TOPIX) returnsas a benchmark.20

(1)

where Rit is the return on stock i on day t, Rmt is the daily return on the valueweighted TOPIX index, and εit is the residuals. The market model isestimated using an estimation window from April 2 to August 23, 2001 (100business days). We then calculate the abnormal returns (AR) for each dayt in the event window, days 0 through +10, where the parameters β0 and β1are estimated by the market model (1).

. (2)

The cumulative abnormal returns (CAR) are calculated for the eventdays t = 0,+1,+2,...,+10. Then, we average CARit across all stocks to obtainCARt

21.

19After that time, it was resolved in October 2002 that the failed insurance company, TAISEI,would be split into the TAISEI Under Rehabilitation Co. and the TAISEI Reinsurance Co. toprotect Sompo Japan from reinsurance obligations related to the failed company. Eventually,Sompo Japan and TAISEI merged with the financial support from the P/C Insurance Policy-holders Protection Corporation of Japan in December 2002.20TOPIX is the stock market index for the TSE in Japan, tracking all domestic companies ofthe exchange’s First Section, which is commonly used as a proxy for market index to con-duct event studies for Japanese stock data.

Rit β0 β1Rmt εit+ +=

ARit Rit β0 β1Rmt+( )–=


. (3)

Hypotheses

Table 2 shows the reinsurance received ratio, defined as the ratio of thereinsurance premium received to the premium income at the end of March2001, the end of fiscal year 2000, in terms of the ranking across all the listedP/C insurance companies at that time. According to Table 2, the industryaverage of the ratio was 7.13%, and only three companies—AIOI, NISSAN,and TAISEI—were above the industry average. Interestingly, these compa-nies revealed that they had heavily committed to the aviation reinsurancemarket through the mediation of Fortress Re several months after TAISEI’ssurprising failure. In retrospect, the reinsurance ratio may imply an expo-sure of reinsurance received by each insurer at the time the terrorist attacksoccurred. Therefore, if the reinsurance ratio is recognized as the reinsur-ance received exposure, we can expect that insurers with a higher reinsur-ance ratio would experience a more negative reaction on their stock price.

Hypothesis 1: The Japanese P/C insurers with a higher reinsuranceratio did NOT experience a more negative reaction on their stock pricethan the other P/C insurers in the immediate aftermath of the terroristattacks.

As we have mentioned, it is too difficult for stockholders to understandthe details of reinsurance transactions. Almost all of the stockholders failedto anticipate the attacks’ real impact on the industry through global rein-surance transactions until the occurrence of a real event, TAISEI’s failure.In other words, an essential meaning of the reinsurance ratio could berevealed by TAISEI’s failure. Therefore, we also expect that the TAISEIbankruptcy was the first time the stock market recognized the real impactof the terrorist attacks on the P/C insurers with a high reinsurance ratio.

Hypothesis 2: The Japanese P/C insurers with a higher reinsuranceratio experienced a more negative reaction on their stock price thanthe other P/C insurers in the immediate aftermath of TAISEI’s failure.

21We checked whether there were amy important confounding events around our eventdays (September 12, 2001 and November 22, 2001) on “The Statistics of Japanese Non-LifeInsurance Business, 2001” (pp. 218–221). Most news items related to issues with new prod-ucts. Therefore, we suppose there were no crucial events to confound our events.

CARit ARitt 0=

10

∑=


EMPIRICAL RESULTS

Abnormal Returns after the Terrorist Attacks on September 11

Table 3 shows results for each of the days between the event day(September 12, 2001, Japan time) and 10 days after (September 27, 2001).Abnormal returns on the event day are significantly negative across allspecifications, indicating that the stock prices of Japanese P/C insurerswere statistically getting lower than the average of the TSE market. Incontrast, note that the impacts are no different between the high-reinsur-ance-received group (HIGH Gr.) and the all-listed-P/C-insurer group (ALL

Table 2. Reinsurance Received Ratio at the End of Fiscal Year 2000 a

Company name Reinsurance received ratiob Remarks column

TAISEI 11.43% Bankruptcy on Nov. 22

CHIYODA (AIOI) 10.29% Fortress Rec

NISSAN 9.32% Fortress Rec

DAI-TOKYO (AIOI) 7.46% Fortress Rec

DOWA 7.01%NISSHIN 6.56%SUMITOMO 6.48%TOKYO MARINE 6.43%MITSUI 6.37%NICHIDO 6.15%YASUDA 6.09%NIHON 5.79%KOA 5.27%FUJI 5.16%

Mean 7.13%Standard deviation 1.89%

aThe Japanese business year starts in April and ends in March, meaning the end of fiscalyear 2000 is the end of March 2001.bReinsurance received ratio is defined as the percentages of the reinsurance premiumreceived to the premium income.cThese P/C insurers heavily committed to the aviation reinsurance market through themediation of Fortress Re. Because CHIYODA merged with DAI-TOKYO in April 2001and the combined company is AIOI, the new company finally announced its reinsurancelosses arising from the terrorist attack after the TAISEI's failure.


Tab

le 3

. Abn

orm

al R

etur

ns fo

r Se

ptem

ber

11 A

ttac

ks

HIG

H G

r.a

All

liste

d P

/C

(exc

lud

ing

SUM

ITO

MO

)bA

ll lis

ted

P/C

(inc

lud

ing

SUM

ITO

MO

)c

Day

dA

R(%

)t-

valu

eC

AR

(%)

t-va

lue

AR

(%)

t-va

lue

CA

R(%

)t-

valu

eA

R(%

)t-

valu

eC

AR

(%)

t-va

lue

009

/12

/20

01–4

.56

–2.5

9**

–4.5

6–2

.59*

**–4

.32

–4.4

9***

–4.3

2–4

.49*

**–4

.26

–4.5

1***

–4.2

6–4

.51*

**

+1

09/

13/

2001

1.78

1.01

–2

.78

–1.5

8 2.

182.

27**

–2.1

4–2

.22*

*2.

032.

15**

–2.2

3–2

.36*

*

+2

09/

14/

2001

0.17

0.10

–2

.61

–1.4

8 0.

600.

63

–1.5

3–1

.59

0.55

0.58

–1

.68

–1.7

8*

+3

09/

17/

2001

–1.0

1–0

.57

–3.6

2–2

.06*

*–1

.55

–1.6

1 –3

.08

–3.2

0***

–1.4

6–1

.55

–3.1

5–3

.33*

**

+4

09/

18/

2001

–2.0

6–1

.17

–5.6

7–3

.23*

**–2

.89

–3.0

0***

–5.9

7–6

.20*

**–2

.84

–3.0

0***

–5.9

8–6

.34*

**

+5

09/

19/

2001

–4.7

9–2

.72

***

–10.

46–5

.95*

**–2

.90

–3.0

1***

–8.8

7–9

.21*

**–3

.00

–3.1

7***

–8.9

8–9

.51*

**

+6

09/

20/

2001

–1.6

0–0

.91

–12.

06–6

.86*

**–1

.07

–1.1

1 –9

.94

–10.

33**

*–1

.47

–1.5

5 –1

0.44

–11.

06**

*

+7

09/

21/

2001

–5.3

1–3

.02*

**

–17.

37–9

.88*

**–2

.92

–3.0

3***

–12.

86–1

3.36

***

–2.5

3–2

.67*

**–1

2.97

–13.

74**

*

+8

09/

25/

2001

4.56

2.59

**

–12.

81–7

.29*

*1.

461.

51

–11.

41–1

1.84

***

N/A

+9

09/

26/

2001

1.98

1.12

–1

0.84

–6.1

7***

2.54

2.64

**–8

.87

–9.2

1***

N/A

+10

09/2

7/20

013.

882.

21 *

*–6

.95

–3.9

6***

2.23

2.31

**–6

.64

–6.9

0***

N/A

*Sig

nifi

cant

at t

he 1

0% le

vel.

**Si

gnif

ican

t at t

he 5

% le

vel.

***S

igni

fica

nt a

t the

1%

leve

l.a H

IGH

Gr.

con

sist

s of

com

pani

es w

hose

rei

nsur

ance

rec

eive

d r

atio

s w

ere

high

er th

an th

e in

dus

try

aver

age

(7.1

3%; s

ee T

able

2) a

t the

end

of M

arch

200

1.

Inte

rest

ingl

y, th

ese

P/C

insu

rers

are

TA

ISE

I, N

ISSA

N, a

nd A

IOI (

the

com

bine

d c

ompa

ny o

f CH

IYO

DA

and

DA

I-T

OK

YO

), co

rres

pond

ing

exac

tly

to th

e P

/C

in

sura

nce

grou

p lin

ked

to th

e re

insu

ranc

e tr

ansa

ctio

n by

For

tres

s R

e.b A

s w

e m

enti

oned

in c

onte

xt, t

he fo

llow

ing

12 P

/C

insu

ranc

e co

mpa

nies

wer

e lis

ted

in T

SE a

roun

d th

e ev

ents

of S

epte

mbe

r 11

: TA

ISE

I, N

ISSA

N, A

IOI,

DO

WA

, N

ISSH

IN, S

UM

ITO

MO

, TO

KY

O M

AR

INE

, MIT

SUI,

NIC

HID

O, Y

ASU

DA

, NIP

PO

NK

OA

, and

FU

JI. H

owev

er, S

UM

ITO

MO

(the

mer

ged

com

pany

) was

del

iste

d

on S

epte

mbe

r 25

, 200

1 be

cau

se S

UM

ITO

MO

wou

ld m

erge

wit

h M

ITSU

I on

Oct

ober

1, 2

001.

In o

ther

wor

ds,

the

stoc

k pr

ices

of S

UM

ITO

MO

hav

e be

en u

sed

sin

ce

Sept

embe

r 21

, 200

1. H

ence

, SU

MIT

OM

O is

exc

lud

ed in

this

“A

ll lis

ted

P/

C”

sam

ple.

Inst

ead

, we

iden

tify

the

stoc

k pr

ices

of M

ITSU

I as

thos

e of

MIT

SUI-

SUM

ITO

MO

, the

mer

ging

com

pany

, for

est

imat

ion

of A

R a

fter

Sep

tem

ber

25, 2

001.

c Bec

ause

SU

MIT

OM

O is

incl

uded

in th

is “

All

liste

d P

/C”

sam

ple,

the

AR

is N

OT

est

imat

ed a

fter

Sep

tem

ber

25, 2

001.

dM

arke

ts w

ere

clos

ed M

ond

ay, S

epte

mbe

r 24

, 200

1 in

obs

erva

nce

of th

e an

nual

Sep

tem

ber

22/

23 n

atio

nal p

ubl

ic h

olid

ay, S

hubu

n no

Hi (

autu

mna

l equ

inox

).


Gr.). HIGH Gr. is composed of companies whose reinsurance receivedratios were higher than the industry average (7.13%; see Table 2) at the endof March 2000. Interestingly, these P/C insurers are TAISEI, NISSAN, andAIOI (the merged company of CHIYODA and DAI-TOKYO), correspond-ing exactly to the P/C insurance group linked to the reinsurance transac-tions of Fortress Re.22 The AR of the event day of the HIGH Gr. is –4.56%,which is almost the same as the impact of the ALL Gr. (–4.32 or –4.26%).This result indicates the Japanese stock market did not react differently tothe reinsurance transaction effects from the terrorist attacks.

Abnormal Returns after TAISEI’s Failure

As mentioned earlier, a mid-sized P/C insurance company, TAISEI,went bankrupt on November 22, 2001, two months after the event, becauseof massive reinsurance claims arising from the terrorist attacks. Table 4shows the results for each of the days between the event day (November12, 2001) and 10 days after (December 7, 2001). Abnormal returns on theevent day are significantly negative across all specifications. However, notethat the impacts vary among them. The AR of the event day of the Re-InsGr. is –15.65%, an impact larger than that of the SJ Gr. (–11.83%); theseresults come from the different reaction of AIOI and YASUDA becauseNISSAN belongs to both groups. Therefore, we clarify whether or not theAR is still significant after removing NISSAN from those two groups. Infact, the AR of the event day of AIOI is –12.99%, an impact much largerthan that of YASUDA (–5.34%). This result indicates that the Japanese stockmarket’s reaction to the reinsurance transaction effects was greater than itsreaction to the merger effects.

Figure 2 shows the cumulative average of abnormal returns. It is clearthat the negative impacts of the Re-Ins Gr. are much larger than those ofthe SJ Gr. The CAR of the Re-Ins Gr. continues to decline until seven daysafter the event day, where the CAR is –72.05%. The CAR then rises slightlyand hovers around –60% through the rest of the event window. By contrast,the CAR of the SJ Gr. is around 30%, and the CAR of the All P/C Gr. isbetween –10% and 15%. These results confirm that the effects of the failureon the reinsurance-related P/C insurers were much larger than those uponthe merger-related P/C insurers, indicating partial support of Hypothesis 2.

22Because CHIYODA merged with DAI-TOKYO in April 2001, the reinsurance receivedratio of the combined company (AIOI) is defined as the average of CHIYODA and DAI-TOKYO at the end of March 2001. That is, the average ratio is calculated by dividing thetotal reinsurance premium received by the total premium income at the end of March 2001.


Determinants of the CAR (0, 1)

In this subsection, we investigate the relationship between the pricechanges resulting from the two catastrophic events and the ex ante riskexposure of the reinsurance transactions. As we discussed in our firsthypothesis, we expect no relationship between the price changes and thereinsurance exposure before TAISEI failed, because the Japanese stockmarket seemed to have not recognized the substantial potential risksthrough the reinsurance transactions at that time. In contrast, our secondhypothesis predicts that the differences of the CAR among Japanese P/Cinsurance companies are explained by those of ex ante risk exposure of thereinsurance transactions among them just after the failure of TAISEI,because the Japanese stock market seemed to have recognized the risks ofreinsurance transactions when TAISEI failed. To investigate the plausibilityof our hypotheses, the following simple regression model is estimated:

. (4)

The REINS variable has the same definition as the reinsurance receivedratio in Table 2, the ratio of the reinsurance premium received to the

CARi αi βiREINSi εi+ +=

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10

Event window (-10,+10)

Re-Ins Gr. SJ Gr. All Listed P/C

Fig. 2. Cumulative abnormal returns (CARs) for TAISEI’s failure on Nov. 22, 2001.


Tab

le 4

. Abn

orm

al R

etu

rns

for

Tais

ei’s

Fai

lure

on

Nov

embe

r 20

01

Re-

Ins

Gr.

(AIO

I and

NIS

SAN

)SJ

Gr.

(YA

SUD

A a

nd N

ISSA

N)

AIO

I

Day

bA

R(%

)t–

valu

eC

AR

(%)

t–va

lue

AR

(%)

t–va

lue

CA

R(%

)t–

valu

eA

R(%

)t–

valu

eC

AR

(%)

t–va

lue

011

/22

/20

01–1

5.65

–8.1

7***

–15.

65–8

.17*

**–1

1.83

–6.2

4***

–11.

83–6

.24*

**–1

2.99

–5.3

3***

–12.

99–5

.33*

**

+1

11/

26/

2001

–13.

97–7

.29*

**–2

9.62

–15.

47**

* –8

.65

–4.5

6***

–20.

48–1

0.81

***

–8.8

2–3

.62*

**–2

1.81

–8.9

5***

+2

11/

27/

2001

–5.5

4–2

.89*

**–3

5.16

–18.

36**

*–2

.95

–1.5

5 –2

3.42

–12.

36**

*–7

.90

–3.2

4***

–29.

70–1

2.19

***

+3

11/

28/

2001

–8.2

5–4

.31*

**–4

3.40

–22.

67**

*–9

.64

–5.0

9***

–33.

07–1

7.45

***

1.34

0.55

–28.

36–1

1.64

***

+4

11/

29/

2001

2.27

1.19

–4

1.13

–21.

48**

*–0

.86

–0.4

5–3

3.93

–17.

90**

*4.

551.

87*

–23.

81–9

.77*

**

+5

11/

30/

2001

–5.7

6–3

.01*

**–4

6.88

–24.

49**

*–2

.02

–1.0

7–3

5.95

–18.

97**

*–7

.11

–2.9

2***

–30.

92–1

2.69

***

+6

12/

3/20

01–1

0.19

–5.3

2***

–57.

08–2

9.81

***

–3.6

7–1

.94*

–39.

62–2

0.90

***

–14.

66–6

.01*

**–4

5.58

–18.

70**

*

+7

12/

4/20

01–9

.77

–5.1

0***

–66.

85–3

4.91

***

–3.6

8–1

.94*

–43.

30–2

2.85

***

–11.

07–4

.54*

**–5

6.65

–23.

24**

*

+8

12/

5/20

0110

.45

5.46

***

–56.

39–2

9.45

***

5.77

3.05

***

–37.

53–1

9.80

***

10.8

54.

45**

*–4

5.81

–18.

79**

*

+9

12/

6/20

01–1

.53

–0.8

0–5

7.92

–30.

25**

*–2

.51

–1.3

3–4

0.04

–21.

13**

*0.

030.

01–4

5.77

–18.

78**

*

+10

12/

7/20

016.

403.

34**

*–5

1.52

–26.

91**

*3.

832.

02**

–36.

21–1

9.11

***

8.64

3.54

***

–37.

14–1

5.24

***

*Sig

nifi

cant

at t

he 1

0% le

vel.

**Si

gnif

ican

t at t

he 5

% le

vel.

***S

igni

fica

nt a

t the

1%

leve

l.a E

xcep

t TA

ISE

I, te

n P

/C in

sura

nce

com

pani

es w

ere

liste

d in

TSE

aro

und

the

even

t of T

AIS

EI’

s fa

ilure

: NIS

SAN

, AIO

I, D

OW

A, N

ISSH

IN, M

ITSU

I-SU

MIT

OM

O,

NIC

HID

O, Y

ASU

DA

, TO

KY

O M

AR

INE

, NIP

PON

KO

A, a

nd F

UJI

.b M

arke

ts w

ere

clos

ed N

ovem

ber

23 in

obs

erva

nce

of th

e an

nual

nat

iona

l pub

lic h

olid

ay K

inro

Kan

sha

no (L

abor

Tha

nksg

ivin

g D

ay).

Tab

le c

onti

nues


Tab

le 4

. con

tinu

ed

YA

SUD

AA

ll lis

ted

P/

C(a

)

Day

bA

R(%

)t–

valu

eC

AR

(%)

t–va

lue

AR

(%)

t–va

lue

CA

R(%

)t–

valu

e

011

/22

/20

01–5

.34

–3.6

7***

–5.3

4–3

.67*

**–4

.81

–4.7

4***

–4.8

1–4

.74*

**

+1

11/

26/

2001

1.82

1.25

–3.5

3–2

.42*

*–3

.65

–3.6

0***

–8.4

6–8

.35*

**

+2

11/

27/

2001

–2.7

1–1

.86*

–6.2

4–4

.29*

**–2

.12

–2.0

9**

–10.

58–1

0.44

***

+3

11/

28/

2001

–1.4

5–1

.00

–7.6

9–5

.28*

**–1

.68

–1.6

6*–1

2.26

–12.

10**

*

+4

11/

29/

2001

–1.7

2–1

.18

–9.4

1–6

.46*

**2.

112.

08**

–10.

15–1

0.02

***

+5

11/

30/

2001

0.36

0.25

–9

.05

–6.2

2**

–0.1

6–0

.16

–10.

31–1

0.17

***

+6

12/

3/20

01–1

.61

–1.1

0 –1

0.66

–7.3

2***

–2.9

3–2

.89*

**–1

3.24

–13.

06**

*

+7

12/

4/20

011.

090.

75

–9.5

6–6

.57*

**–2

.34

–2.3

0**

–15.

58–1

5.37

***

+8

12/

5/20

011.

491.

03

–8.0

7–5

.54*

**1.

441.

42

–14.

14–1

3.95

***

+9

12/

6/20

01–1

.94

–1.3

3 –1

0.01

–6.8

8***

0.66

0.65

–1

3.48

–13.

30**

*

+10

12/

7/20

013.

492.

40**

–6.5

2–4

.48*

**1.

281.

26

–12.

20–1

2.04

***

*Sig

nifi

cant

at t

he 1

0% le

vel.

**Si

gnif

ican

t at t

he 5

% le

vel.

***S

igni

fica

nt a

t the

1%

leve

l.(a

) Exc

ept T

AIS

EI,

ten

P/

C in

sura

nce

com

pani

es w

ere

liste

d in

TSE

aro

und

the

even

t of T

AIS

EI’

s fa

ilure

: NIS

SAN

, A

IOI,

DO

WA

, NIS

SHIN

, MIT

SUI-

SUM

ITO

MO

, NIC

HID

O, Y

ASU

DA

, TO

KY

O M

AR

INE

, NIP

PON

KO

A, a

nd F

UJI

.(b

) Mar

kets

wer

e cl

osed

Nov

embe

r 23

in o

bser

vanc

e of

the

annu

al n

atio

nal p

ubl

ic h

olid

ay K

inro

Kan

sha

no (L

abor

T

hank

sgiv

ing

Day

).


premium income at the end of fiscal year 2000. REINS is our proxy variablefor the ex ante risk exposure of reinsurance transactions in the globalmarket. εi is the residual error. If stock price decreases are caused by thereinsurance transactions, we expect a negative coefficient for REINS.

Table 5 shows descriptive statistics of the CAR (0, 1) and REINS. PanelA in Table 5 shows the means of the CAR for the two catastrophic events,which reveal that the CAR of November 22 (–8.31%) is much lower thanthat of September 12 (1.83%). This indicates that the stock prices of JapaneseP/C insurers fell substantially more when TAISEI went bankrupt than onSeptember 12. Panel B in Table 5 shows the mean of REINS. The averageof REINS is 6.7%, and it varies from 5.2% to the maximum of 9.3% acrossJapanese P/C insurance companies.

Table 6 presents the results of the determinants of the CAR acrossJapanese P/C insurers, based on the pooled full-sample for the two cata-strophic events (Columns 1 to 4) and on each event (Columns 5 to 8).23 Notethat we include the event dummy variable (which takes a value of 1 if theevent is on September 12) in order to control for the different effects fromeach event in the pooled estimation.

Column 1 shows the estimated effects of reinsurance exposure for thepooled full sample. The CAR falls by a statistically and economicallysignificant amount.24 This estimate is representative of the several alterna-tive estimated effects that appear in this table. The size of the estimatedeffect suggests that for each 1% increase of reinsurance risk exposure, theCAR falls by 2.4%.

Column 2 shows the regression result of Eq. (4), replacing REINS withthe REINS*0912 dummy and the REINS*1122 dummy, where the 0912dummy (or 1122 dummy) takes the value one if the event is on September12 (or November 22); otherwise it takes the value of zero. By this separationof the REINS variable, we can identify the reason why the coefficient ofREINS in Column 1 is negatively correlated with the CAR. Row 2 showsthat the reinsurance risk exposure on September 12 has no significanteffects on the CAR. This indicates that the reinsurance risk exposure of eachP/C insurance company is not related to the CAR before the failure ofTAISEI. In other words, this result implies that the market did not anticipateat that time the catastrophic losses that would be caused by the terroristattacks on September 12 through the global reinsurance transactions. Onepossible reason for REINS*0912 being generally insignificant is that theCAR on September 12 has very little volatility, as shown in Panel A of Table

23We also estimate the cases of AR, CAR (0, 2), which are qualitatively the same resultsreported below. Thus, we omit them.24T-statistics are in parentheses under each coefficient in Table 6.


5. As we discussed in the previous section, it is true that the CAR wasstatistically lower than the average of the TSE market, but the variationsacross Japanese P/C insurers were very small. This implies that the market

Table 5. Descriptive Statistics

Panel A: CAR(0,1)

Sep. 12, 2001N = 12

Nov. 22, 2001N = 10b

Teststatisticsa

PooledN = 22

Mean 1.83% –8.31% (1.656) –4.77%Std. dev 2.16% 12.70% (34.624)*** 9.08%Min. –4.62% –37.43% –37.43%Max. 3.11% 3.54% 3.54%

Panel B: Independent variables(c)

Mean Std. dev. Min. Max.

REINS (pooled) 6.74% 1.26% 5.16% 9.32%

Panel C: Correlation coefficients

Pooled sample (N = 22) REINS MERGER MERGER*FORTRESS

REINS 1.000 MERGERd 0.230 1.000 MERGER*FORTRESSe 0.484 0.671 1.000

***Significant at the 1% level.**Significant at the 5% level.*Significant at the 10% level.aTest statistics show both results of the T-test for difference of mean (assuming unequalvariances) and F-test for difference of variance.bSUMITOMO is excluded in the sample because it was delisted on September 25, 2001.cThe REINS variable is the same definition as reinsurance received ratio on Table 2,defined as the ratio of the reinsurance premium received to the premium income at theend of fiscal year 2001. In addition, we revise the values of REINS for merged companiessince some companies merged in April 2001. REINS for merged companies in our analysisis defined as follows: total reinsurance premium received to the total premium income atthe end of fiscal year 2001.dMERGER is a dummy variable that takes a value one if an insurer is a member of SJ Gr.,otherwise zero. eMERGER*FORTRESS is a cross-term variable MERGER with FORTRESS, whereFORTRESS is a dummy variable if an insurer has contracted reinsurance transactionsthrough Fortress Re at that time.


reacted against the Japanese P/C industry as a whole, but it did notconsider the relative different risk exposure of the P/C companies fromtheir reinsurance transactions at that time.

In contrast, the coefficient of reinsurance exposure on November 22 isa statistically and economically significant amount: –6.958. The estimatedeffect suggests that for each 1% increase of reinsurance risk exposure, theCAR falls by 6.9%. This result is consistent with our second hypothesis,indicating that, contrary to the event of September 12, the market recog-nized the catastrophic losses from the global reinsurance transactions atthis later time. In addition, remember again the difference in CARs betweenthe two subsamples from September 12 and November 22 in Table 5, whichsupports the idea that the Japanese stock market reacted to the risk ofterrorism through TAISEI’s failure rather than immediately from Septem-ber 12 itself.25

Of course, the negative impacts might come from the contagion effectsof the failure of TAISEI, especially for the SJ Gr. that was supposed to mergewith TAISEI into Sompo Japan. Column 3 added the MERGER variable,which is a dummy variable that takes the value one if an insurer is amember of SJ Gr., otherwise zero. The coefficient of MERGER is negativebut not significant, indicating that there were no contagion effects of theTAISEI failure on the SJ Gr.

Column 4 added the cross-term variable MERGER with FORTRESS,where FORTRESS is a dummy variable if an insurer had contracted rein-surance transactions through Fortress Re at that time. Although it is actu-ally a dummy variable for NISSAN in our small sample, the coefficient isnegative and statistically significant.26 As seen in Figure 2, there exists anegative impact from the reinsurance exposure, but an economically smallimpact on the CAR. Note also that REINS*1122 dummy in Column 4 is alittle smaller than that in Column 2 or 3, indicating that for each 1% increaseof reinsurance exposure, the CAR falls by 5.4%.

As a robustness check, Columns 5 to 8 show the results of the subsam-ples based on each loss event. Row 1 in Column 5 and Column 6 shows theestimated effects of the reinsurance exposure on the CAR. Presumably, the

25Our referees suggest discussing this point, and we appreciate their comments.26As we discussed previously, AIOI and NISSAN as well as TAISEI were closely relatedthrough their reinsurance contracts via the mediation of Fortress Re, a U.S. reinsuranceunderwriting manager. Fortress Re had pooled the funds of these companies to share therisks of reinsuring aviation portfolios, so AIOI and NISSAN both faced the problem of enor-mous payments of reinsurance from the attacks. In addition, YASUDA, NISSAN, and TAI-SEI had already announced a schedule to merge by April 2002 before the terrorist attacksoccurred. Therefore, only NISSAN was faced with loss exposures closely related to both thereinsurance transaction and the merger issue with TAISEI.


Tab

le 6

. Det

erm

inan

ts o

f Cro

ss-S

ecti

onal

Dif

fere

nce

of C

AR

(0,1

)a

Pool

ed

sam

ple

Poo

led

sa

mpl

eP

oole

d

sam

ple

Pool

ed

sam

ple

Sep.

12,

20

01N

ov. 2

2,

2001

Nov

. 22,

20

01N

ov. 2

2,

2001

Var

iabl

e(1

)(2

)(3

)(4

)(5

)(6

)(7

)(8

)

0C

onst

ant

0.08

00.

387

0.36

00.

291

0.01

40.

387

–0.0

53–0

.051

(1.0

3)(3

.52)

***

(3.2

4)**

*(2

.50)

**(0

.54)

(2.4

2)**

(–1.

28)

(–1.

91)*

1R

EIN

S–2

.430

–0.4

50–6

.958

(–2.

21)*

*(–

1.29

)(–

2.99

)**

2R

EIN

S*09

12d

umm

y–0

.450

–0.3

110.

134

( –0.

42)

(–0.

30)

(0.1

3)3

RE

INS*

1122

du

mm

y–6

.958

–6.4

43–5

.399

( –4.

35)*

**( –

3.92

)***

(–3.

10)*

**5

ME

RG

ER

–0.0

45–0

.152

( –1.

17)

(–1.

66)

6M

ER

GE

R*F

OR

TR

ESS

–0.0

96–0

.324

( –1.

80)*

(–3.

85)*

**F-

stat

isti

c4.

27**

8.24

***

6.65

***

7.76

***

1.67

8.94

**2.

7414

.80*

**R

20.

31–

––

0.14

0.53

0.26

0.65

Ad

just

ed R

2–

0.51

0.52

0.56

––

––

Obs

erva

tion

s22

2222

2212

1010

10

a Each

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results show almost the same effects as the pooled estimation in Column2. In addition, the results of Column 7 or Column 8 are similar to those inthe pooled estimation in Columns 3 or 4. Overall, our estimation resultsindicate that the Japanese stock market recognized the catastrophic lossesfrom the global reinsurance transactions when TAISEI went bankrupt.

SUMMARY AND CONCLUSION

This study investigates the reaction of the stock prices of JapaneseP/C insurers, one of the largest foreign insurance markets, to the terroristevents of September 11, 2001 at the U.S. World Trade Center. Recently,catastrophic losses occurring in one country have the potential to spreadrapidly to the insurance industries in other countries because the globalnetwork of reinsurance markets has become extremely well-developed. Infact, the globally well-developed network could serve as a transmissionvehicle of risk exposures for the world economy. Surprisingly, there havebeen few studies examining the impact on the foreign insurance industry,although several studies have examined the impact on the stock prices ofthe domestic U.S. insurers.

This study is the first to focus on how the September 11 terrorist attack,one of the largest man-made catastrophic events, affected the stock pricesof foreign insurance companies. Surprisingly, the second event occurredon November 22, 2001, two months after the first event. A mid-sized P/Cinsurance company, TAISEI, went bankrupt due to massive reinsuranceclaims arising from the terrorist attacks. Therefore, this study comparesboth events using the traditional event study methodology to examinewhen the losses arising from the events spread to the Japanese P/Cinsurance industry. We then investigate the relationship between the pricechanges resulting from the two loss events and the ex ante risk exposure ofthe reinsurance transactions. Overall, our estimation results indicate thatthe Japanese stock market did not recognize the risk of catastrophic lossesthrough the global reinsurance network until TAISEI went bankrupt. Thus,our results indicate that the disclosure required for reinsurance transac-tions was quite insufficient immediately after the events of September 11.

In recent years, especially after the September 11 events, publicconcern with regulation and disclosure for global reinsurance transactionshas been growing. In fact, the IAIS has also discussed how regulation ofthe global reinsurance market should function. This study may help notonly investors and insurance companies but also regulators to betterunderstand the consequential impact of catastrophic events on foreigninsurance industries through global reinsurance transactions. It appears


that the disclosure requirements for reinsurance transactions have beeninsufficient, and thus, strengthening of the disclosure and accountabilityregulations has been required. Regulators should focus on how to developthe standards of transparency and disclosure for global reinsurancetransactions.

REFERENCES

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Chen, X, H Doerpinghaus, BX Lin, and T Yu (2008) Catastrophic Losses and InsurerProfitability: Evidence from 9/11, Journal of Risk and Insurance, 75 (1): 39–62.

Cummins, JD and C Lewis (2003) Catastrophic Events, Parameter Uncertainty andthe Breakdown of Implicit Long-Term Contracting: The Case of TerrorismInsurance, Journal of Risk and Uncertainty, 26(2/3): 153–178.

Doherty, N, J Lamm-Tennant, and L Starks (2003) Insuring September 11th: MarketRecovery and Transparency, Journal of Risk and Uncertainty, 26(2/3): 179–199.

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Marlett, D, J Griffith, C Pacini, and R Hoyt (2003) Terrorism Insurance Coverage:The Market Impact on Insurers and other Exposed Industries, Journal of InsuranceRegulation, 22(2): 41–62.

Shelor, RM, DC Anderson, and ML Cross (1992) Gaining from Loss: Property-Liability Insurer Stock Values in the Aftermath of the 1989 California Earth-quake, Journal of Risk and Insurance, 59 (3): 476–488.

Swiss Re (2002) Natural Catastrophes and Man-Made Disasters in 2001: Man-MadeLosses Take on a New Dimension, Sigma, No. 1/2002.

Wang, Y and R Corbett (2008) Market Efficiency: Evidence from Market Reactionsof Insurance Industry Stocks to the September 11, 2001 Event, Journal of InsuranceIssues, 31 (2): 152–167.

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