Catastrophe Reinsurance and Risk Capital in the Wake of the Credit Crisis
Journal of Risk Finance Vol. 10, No. 5 (2009)
Posted: 3 Aug 2009 Last revised: 21 Dec 2014
Date Written: August 3, 2009
In 2008, the property and casualty insurance industry was adversely affected by significant natural catastrophe-related losses, floundering investments, and limited access to capital markets. Catastrophe reinsurance premiums have risen and capacity has shrunk. Especially at such times, risk capital is an essential component of a P&C insurer’s economic balance sheet. In this article we review the similarities and differences between internal risk capital (provided by investors in insurance company debt and equity in the sense of Merton and Perold (1993)) and external risk capital (including traditional reinsurance, catastrophe derivatives, industry loss warranties, and insurance-linked securities). We explore the relative benefits and costs of alternative sources of risk capital for both policyholders and insurance company shareholders and analyze the impact of the credit crisis on these various interrelated markets.
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