Evaluating Catastrophe Risk Transfer Alternatives Through Dynamic Financial Analysis

Companies subject to significant catastrophe losses are continually evaluating their appetite and tolerance for risk. A sound process of linking catastrophe models to financial output is critical to understanding the implications of risk management strategies. Therefore, dynamic financial models are playing an increasingly important role in evaluating risk transfer strategies. In this paper, we will use the ex ample of Butterfly Insurance Company to illustrate the hurdles involved when incorporating catastrophe modeling in DFA and various methods of presenting results. We will also demonstrate how the buyer of a catastrophe reinsurance structure optimally selects the attachment and the limit using either a heuristic approach or a cost of capital approach.