To properly address catastrophe, property and casualty insurers first determine how much loss they can bear without suffering unacceptable adverse impact. Each insurer’s risk appetite is unique and often expressed as a maximum acceptable reduction to surplus from a single event or multiple events in a year. This gives underwriters a maximum guideline for monitoring whether catastrophe risk in the insured portfolio is within reasonable bounds. The company should always be aware of its current exposure to catastrophes by referring to a model-based loss exceedance probability curve or using simple measures such as total amount of written premium and number of insured structures in a geographical area known to be disaster-prone. The company can also estimate a subjective probable maximum loss (PML) resulting from a described event, type of coverage or geographic area. 

Companies have traditionally utilized previous disaster experience before insurers utilized models to estimate catastrophe provisions. However, there are inherent issues with using historical experience to project catastrophe losses, especially for low frequency events like hurricanes. Insurers are now increasingly using advanced computer models to simulate catastrophic losses with the help of multidisciplinary teams consisting of seismologists, meteorologists, actuaries and computer technology specialists for pricing. After a company has determined its risk appetite, measured its current loss exposure and priced the product to the best of its ability, it may realise it needs to reduce risk. This management exercise includes identifying where the company can expand its property portfolio, lowering property exposures through reinsurance, capital market alternatives, deductibles and other loss-mitigation measures. Insurers with catastrophe exposures need to establish contingency plans for handling cash demands. Asset liquidation reduces the asset base, which in turn lowers the opportunity for future investment income and capital gains. Insurers with catastrophe exposure must strike a balance between preparedness for low-probability catastrophes and the cost of pre-event preparations.

 In conclusion, catastrophe exposures place unique demands on insurer capitalization and necessitate a distinct risk management approach. The insurer’s total required capital depends on the company’s overall risk profile, including any interaction or covariance, versus independence, of the various risks the insurer confronts. The catastrophe risk management process for an insurer must be integrated into an overall risk management strategy.

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Reference: https://www.actuary.org/sites/default/files/files/catmonograph_june01.4.pdf/catmonograph_june01.4.pdf