Working Paper: NBER ID: w7287
Authors: Kenneth A. Froot
Abstract: This paper discusses the recent changes in the market for catastrophe risk. These risks have traditionally been distributed through the insurance and reinsurance systems. However, because insurance companies tend to share relatively small amounts of their cat exposures and because insurance companies' capital is threatened by large event, these risks are now being shared partly through the capital markets. In looking to likely future developments, the paper enumerates five key ingredients that successfully structured cat instruments are likely to share: retentions should be substantial; layers of protection should not be too high; dollar amounts of risk transfer should not be too small; loss triggers should be beyond cendent control; and loss triggers should be symmetrically transparent.
Keywords: catastrophe risk; insurance; reinsurance; capital markets; cat bonds
JEL Codes: G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional insurance and reinsurance systems (G22) | Capital markets for catastrophe risk (G10) |
| Computer modeling technologies (C63) | Capacity of the catastrophe risk market (G22) |
| Increased competition (L13) | Prices of catastrophe reinsurance (G22) |
| Structured catastrophe bonds (H84) | Investor interest in catastrophe bonds (G12) |