Reinsurance Why Have Cat Losses Case Study

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By having more low risk, high certainty policies in areas not prone to disaster, insurance companies can better cover losses that occur in areas predisposed to disaster. National manages CAT's through a combination of these measures. One method is usually not enough to completely diversify risk. In many instances, it is necessary to use a combination of methods in the event that one is more advantageous to another in a given situation.

3. What are the pros and cons of using insurance securities vs. reinsurance?

Insurance securities such as CAT bonds offer a higher rate of return for investors. Also, many of these securities are not linked to the financial markets which make them particularly attractive. By having a position in insurance securities, the individual is essentially diversifying a portion of the risk of the financial market. However, these instruments have inherently higher risk associated with them. As a result, an investor who is not meticulous in his or her research could lose sever amounts of wealth through the improper use of insurance securities.

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Reinsurance first provides a means of risk reduction. Through risk reduction, a company such as National can avoid the high proportion of volatility in yearly earnings that is common within the industry. This is essentially important to potential investors. Investors on average tend to like stable, consistent earnings as oppose to volatile and sporadic earnings. In the event that National will need funding from equity investors, it will be important to show consistent and sustainable history of earnings growth. Through a combination of reinsurance and other financial vehicles, National can position itself more favorably in the minds of investors.

Reinsurance does however have negatives however, for one, the reinsurer participates in both the profits and losses for a policy. For example, September 11th resulted in the highest insured casualty losses in the world to date with approximately $40 billion being lost. 60% of these loses however were paid through reinsurance companies. As a result of attempted to diversify risk, reinsurance companies paid a portion of the total amount. However, the portion was very.....

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