Simulating a Catastrophe Insurer

This Demonstration simulates the financial history of a catastrophe insurer. You select a variety of parameters that affect that financial history and the Demonstration responds with a graphic showing the annual net worth of the insurer for each of a user-chosen number of sample runs. You can also choose to display a histogram showing the distribution of the net worth of the insurer either at the end of the simulations or at its lowest annual value.

You choose a number of parameters likely to affect the financial histories. You choose the number of years for which the Demonstration computes the annual covered losses suffered by the insurer as a result of catastrophes such as earthquakes, hurricanes, or tornadoes. You choose the number of sample runs of the system. You can choose to amplify (or reduce) the losses resulting from each event. You also determine the initial balance sheet of the insurer (assets and liabilities), the interest rate the insurer pays on debt, and the amortization period of debt. Finally, you affect the annual operating profits and losses of the insurer by determining its annual premium revenue net of overhead expenses, the return it makes on its assets, and any legal limitation on the amount of losses it needs to pay.