Interpreting Model Output - The California Earthquake Authority and the Cost of Capital of the Reinsurance Layer

Actuaries and other financial analysts have had difficulty interpreting the voluminous data that is typically output by a dynamic financial model. This paper illustrates the use of the decision-theoretic approach of Borch (1962) and Van Slyke (1995) to produce a simple illustration of the meaning of the results of 10,000 simulations of the financial results of a reinsurance program. The model's results are related to the cost of capital in international financial markets.