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Reinsurance uptake greater in catastrophe-prone regions

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Insurers in regions that are susceptible to large natural catastrophes buy more reinsurance than those where catastrophes are less likely, says the Federal Reserve Bank of Chicago.

The study in the Chicago Fed Letter published Thursday, also concluded that reinsurance helps insulate insurers from catastrophes.

The study looked at the proportion of premiums transferred to reinsurers between 2005 and 2015, and focused on insurers with more than half of their operations in a single census division.

It found that insurers with operations in the catastrophe-prone South Atlantic and West South Central states used the most reinsurance during this period, transferring 32% and 33% of their insurance premiums respectively.

The South Atlantic region includes Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia and the District of Columbia. The West South Central region includes Arkansas, Louisiana, Oklahoma and Texas.

In contrast, insurers in the Pacific and Mountain divisions transferred just 8% and 9% of their insurance premiums respectively.

The report notes that given the earthquake risk in the Pacific states, it might seem surprising so little risk is transferred, but because only 10% to 17% of California residents have quake insurance, it is not costly to insurers.

Data also shows reinsurance is effective in smoothing catastrophes' impact for insurers.

“The fact that losses after reinsurance are a relatively constant share of premiums even when direct losses are large means that reinsurance payments increase more proportionally with direct losses, highlighting the importance of non-proportional reinsurance in protecting against large losses,” says the study.

The report, “Do insurers in catastrophe-prone regions buy enough reinsurance?” was written by Chicago Fed associate economist Florentine M. Eloundou Nekoul and policy economist Alejandro Drexler.