The price of insurance is thus very sensitive to the ratio of the amount of capi-
tal to expected liability, needed to preserve one's credit rating. A ratio of 1 is normal
for the combined books of business of many property liability insurers. However, for
catastrophic risk, with its very large tail risk (which severely affects the insurer’s credit
risk), the capital to liability ratio needs to be higher. Indeed, the capital-to-liability ratio
depends on volatility of the catastrophe liability and its correlation with the insurer’s
remaining portfolio. For the catastrophe risk premium for individual ...
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