Catastrophe Reinsurance

Definition

Catastrophe reinsurance (commonly called 'cat reinsurance') is a specialized form of excess-of-loss reinsurance that protects primary insurance companies against the aggregated losses arising from a single large-scale natural or man-made catastrophe event—such as a major hurricane, earthquake, wildfire, or pandemic. Under a typical catastrophe excess-of-loss treaty, the primary insurer retains aggregate losses up to a defined retention amount (e.g., $100 million per event) and the reinsurer covers losses between the retention and the treaty limit (e.g., $100 million to $1 billion). Multiple layers of cat reinsurance are typically stacked to cover losses up to the insurer's probable maximum loss (PML) as estimated by catastrophe models such as RMS, AIR Worldwide, or KCC. Cat reinsurance pricing is highly volatile: after a quiet catastrophe year, prices soften as reinsurers compete for business; after major events (e.g., 2005 Hurricane Katrina, 2017's Harvey/Irma/Maria trifecta, 2017–2018 California wildfires), reinsurance capacity contracts and prices spike dramatically. The January 2023 catastrophe reinsurance renewal saw some of the largest rate increases in decades—30%–50% or more in loss-affected territories—as reinsurers repriced their portfolios following years of above-average losses. Alternative capital vehicles such as catastrophe bonds (cat bonds) and insurance-linked securities (ILS) have grown to represent approximately 15%–20% of total global cat reinsurance capacity.

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