A Formal Approach to Catastrophe Risk Assessment in Management

Insurers paid $1.9 billion on property claims arising from catastrophes in 1983. Researchers have estimated that annual insured catastrophe losses could exceed $14 billion. Certainly, the financial implications for the insurance industry of losses of this magnitude would be severe; even industry losses much smaller in magnitude could cause financial difficulties for insurers who are heavily exposed to the risk of catastrophic losses. The quantification of exposures to catastrophes, and the estimation of expected and probable maximum losses on these exposures pose problems for actuaries. This paper presents a methodology based on Monte Carlo simulation for estimating the probability distributions of property losses from catastrophes and discusses the uses of the probability distributions in management decision-making and planning.