Exposure to catastrophe risk and use of reinsurance: an empirical evaluation for the U.S.

Abstract

Abstract Reinsurance has long been used for tail risk protection. There is ample anecdotal information from practitioners about this dimension of reinsurance. The subject, however, remains largely unexplored in the academic literature given the lack of data about non-proportional reinsurance contracts. We develop a novel approach to measure the use of non-proportional reinsurance and use it to disentangle reinsurance used for catastrophe risk protection from reinsurance used for other motivations, for example regulatory capital relief. Our findings rely on a new measure of catastrophe risk that has strong explanatory power about insurers’ behaviour towards risk beyond what has been captured by existing measures.