Quantifying the Role of Occurrence Losses in Catastrophe Excess of Loss Reinsurance Pricing

Shree Khare and Keven Roy
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Shree Khare: Risk Management Solutions, The Minster Building, 21 Mincing Lane, London EC3R 7AG, UK
Keven Roy: Hiscox, 1 Great St. Helen’s, London EC3A 6HX, UK

Risks, 2021, vol. 9, issue 3, 1-40

Abstract: The aim of this paper is to merge order statistics with natural catastrophe reinsurance pricing to develop new theoretical and practical insights relevant to market practice and model development. We present a novel framework to quantify the role that occurrence losses (order statistics) play in pricing of catastrophe excess of loss (catXL) contracts. Our framework enables one to analytically quantify the contribution of a given occurrence loss to the mean and covariance structure, before and after the application of a catXL contract. We demonstrate the utility of our framework with an application to idealized catastrophe models for a multi-peril and a hurricane-only case. For the multi-peril case, we show precisely how contributions to so-called lower layers are dominated by high frequency perils, whereas higher layers are dominated by low-frequency high severity perils. Our framework enables market practitioners and model developers to assess and understand the impact of altered model assumptions on the role of occurrence losses in catXL pricing.

Keywords: occurrence losses; catXL pricing; order statistics; catastrophe risk modeling (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:9:y:2021:i:3:p:52-:d:515903

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