Research Summary

Distribution of Insurance Risk

by Kenneth A. Froot

Description

Risks that originate with natural disasters such as hurricanes, earthquakes, and floods are substantial enough to exhaust the capital and surplus of insurers and reinsurers many times over. Despite significant advances in the efficiency of risk allocation in the financial system, these catastrophic risks are still largely allocated through brokered insurance and reinsurance agreements. Faculty involved in the Global Financial System project who are pursuing this stream of research, Kenneth A. Froot and Sanjiv R. Das, are studying primarily the institutional arrangements for distributing catastrophic risks. In addition to comparing public and private mechanisms for distributing and analyzing various securities designed to aid in the allocation or hedging of catastrophic risk, they have undertaken an empirical investigation of the pricing of catastrophic exposures. The latter work reveals the historical returns reinsurers have realized from writing catastrophic risks and provides a basis for testing hypotheses about the formulation of catastrophic cover prices.