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Catastrophe Reinsurance How much is enough??

Catastrophe Reinsurance How much is enough??. Financing the Risks of Natural Disasters: A new perspective on Country Risk Management World Bank Conference June 2, 2003. Milo Pearson California Earthquake Authority. Agenda. Challenges of Loss Prediction

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Catastrophe Reinsurance How much is enough??

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  1. Catastrophe ReinsuranceHow much is enough?? Financing the Risks of Natural Disasters: A new perspective on Country Risk Management World Bank Conference June 2, 2003 Milo Pearson California Earthquake Authority

  2. Agenda • Challenges of Loss Prediction • Financial Objectives of the Organization • Reinsurance Cost Elements • Reinsurance Alternatives • Catastrophe Models and Applications • California Earthquake Authority: A case history

  3. How much reinsurance is enough? ….It depends!!!!

  4. What are the Financial Objectives of the Organization? • Risk of Ruin • Continuity • Survivability • Sustainability

  5. Basic Technical Elements of Reinsurance Costs • Market Capacity/Customer • Probabilities of Loss • Historical (Actual) • Modeled: Expected Loss (mean) and Variability of Outcomes (standard deviation)

  6. Reinsurance Alternatives • Bonds: Revenue, CAT, etc. • Industry Loss Warranties • Letters of Credit • Assessments

  7. Decisions should be made in an open forum by the organization’s governing body.

  8. Three Major “CAT” Modelers • EQECAT • RMS • AIR

  9. Input • Exposure Data • Limits, Values, Deductibles • Construction, Occupancy, Etc. Output • Exceeding Probability Curve: A table or graph of increasing modeled loss amounts and the probability that the loss will not be exceeded. • Average Annual Loss (Pure Premium): Modeled loss estimate of the average loss that can be expected each year.

  10. Sample Financing Tower Structure Return Time of Loss Limits (Billions) $8.0 490 $7.0 237 $6.0 118 $5.0 49 $4.0 28 $3.0 15 $2.0 8 $1.0 5 Hypothetical Government Structure with Return Times

  11. CEA Claims Paying CapacityAs of 1/1/97

  12. CEA Claims Paying CapacityAs of 3/31/03

  13. CEA Claims Paying CapacityComparison

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