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At War with the WeatherManaging Large-Scale Risks in a New Era of Catastrophes$
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Howard C. Kunreuther and Erwann O. Michel-Kerjan

Print publication date: 2009

Print ISBN-13: 9780262012829

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262012829.001.0001

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Private Reinsurers’ Decision Making for Supplying Coverage

Private Reinsurers’ Decision Making for Supplying Coverage

(p.151) 7 Private Reinsurers’ Decision Making for Supplying Coverage
At War with the Weather

Howard C. Kunreuther

Erwann O. Michel-Kerjan

The MIT Press

Reinsurers offer coverage against the catastrophic portion of a loss that insurance companies are not willing to shoulder financially. In exchange for indemnifying an insurer against a layer of the catastrophic losses that the company would otherwise cover, the reinsurer charges a premium. There are two main types of reinsurance: pro rata and excess of loss. When pricing different layers of insurance coverage, the reinsurer takes into account both the expected loss and the variance of losses in its portfolio. The severe hurricanes in 2004 and 2005 caused the reinsurance market in the United States to harden the following year and insurance premiums to increase on average 76 percent between July 1, 2005, and June 30, 2006. Prices fell slightly between July 1, 2006, and June 30, 2007, and continued to fall at the January 2008 renewal before rising by 8 percent at the January 2009 renewal.

Keywords:   reinsurance, insurance, catastrophic losses, pro rata, excess of loss, hurricanes, insurance premiums, insurance coverage, United States

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