An Empirical Analysis of the Property Catastrophe Reinsurance

Abstract

Following a series of costly catastrophes, including Hurricane Harvey and Hurricane Irma in 2017 and the Sichuan Earthquake in 2017, the purchase of property catastrophe reinsurance has become a major topic of debate. Many techniques for selecting an optimal retention and upper limit level have been proposed, but no entirely satisfactory method has been devised. Therefore, in practice, the setting of retentions and upper limits is still more a matter of judgment than science. In this study, we examine the determinants of property catastrophe excess-of-loss reinsurance retentions and limits for property-liability insurance companies in the U.S. insurance industry. A cross-sectional model is estimated using two-stage least squares regression. The regression analysis shows that most coefficients have the hypothesized signs and are significant. This study is the first research that provides clear evidence to support the relationship among retentions, upper limits, and co-reinsurance rates.