Managing catastrophe risk.

Includes references

Introduction -- What are the insurer's odds? -- Why do the odds differ by insurer? -- What drives the costs for catastrophe reinsurance? -- Can the current insurance mechanism handle severe catastrophes? -- Some proposals to solve the catastrophe problem -- Modeling catastrophe risks -- The ISO insurer property inventory -- Adjustments of model estimates of direct property losses for the effects of reinsurance -- Excess pure premium ratio (EPPR)

Since 1989, the surge in catastrophic losses due to natural disasters has caused insurers, regulators, legislators, and others to question whether the property/casualty insurance industry has the financial capacity to handle the increasing disaster risk. This report contains the results of a study of insurers, conducted by the Insurance Services Office (ISO), that analyzed exposure and estimated the potential effects of earthquakes and hurricanes on the insurance industry. ISO dteremined that 73 of the 80 insurer groups studied manage their exposures well enough that the chance of insolvency due to catastrophe in any given year is less than 1%. For the remaining seven groups, probability of insolvency was greater than 1% but less than 5%. This document provides information on recent catastrophes, reinsurance, catastrophe models used by insurers to predict losses, volatility by line of insurance, expected losses, differences in exposure among insurers, the costs of catastrophe reinsurance, and proposals to address the catastrophic insurance difficulties