Global Hazards and Catastrophic Risk: Assessments, Practitioners, and Decision Making in Reinsurance

Abstract

Over the last decade catastrophic natural perils have caused unprecedented losses for the insurance industry. Before 1989, the benchmark loss for insurers and reinsurers was Hurricane Betsy in 1965, with losses just under $1 billion. The Betsy baseline was supplanted by Hurricane Andrew in 1992. Causing over $19 billion in insured losses, this hurricane prompted an industry wide "cognition of catastrophe," i.e. a realization that losses could be of this magnitude and larger. After Andrew, reinsurers invested in the purchase and development of hazard assessments in order to convert the perception of chance events towards a framing of a lack of strategic knowledge, and therefore manageable through greater incorporation of scientific expertise. This paper investigates the saliency, credibility and legitimacy of two forms of catastrophe assessments for the Atlantic hurricane risk, and evaluates their effectiveness towards reinsurance decision outcomes.