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Project Overview: You are the CEO of a Florida based property insurer. Your company sells homeowners insurance in the state of Florida only. Because of

Project Overview:
You are the CEO of a Florida based property insurer. Your company sells homeowners insurance in the state of Florida only. Because of the narrow business focus, your company is highly exposed to catastrophic losses. For simplicity we are going to ignore all non-hurricane related losses (We are assuming that they have already been paid, just as we are assuming all of the premiums for the policies you sold have already been collected). The total surplus that your company has is $700 million. You control 10 percent of the Florida homeowners insurance market. In other words, you can expect your share of all hurricane related losses to be 10% of the total insured hurricane losses. However, historically your share of hurricane losses has been anywhere from 5 percent to 15 percent of total insured losses. Your company is currently rated A by A. M. Best and you have been told by A. M. Best that if your surplus falls below $400M you will be downgraded. You have consulted with your reinsurance brokers and you have been able to narrow down your capital structure decisions to one of four choices.
1. Do nothing. Do not purchase any reinsurance, nor do anything with Cat Bonds. In other words, go bare.
2. Purchase a reinsurance contract that has a $125M policy limit (per occurrence) and a $25M retention. This reinsurance contract will cost $40M (out of your $700M surplus).
3. Purchase a reinsurance contract that has a $300M policy limit (aggregate) and a $100M aggregate retention. This reinsurance contract will cost $105M (out of your $700M surplus).
4. Issue a Catastrophe bond that pays you $200M if aggregate industry losses exceed $2B in a storm season. The cost of issuing the cat bond is $25M (out of your $700M surplus).
Based on these choices, you must answer the following questions (Justify each answer) using simulation analysis:
1. Which capital structure yields the highest insurer capital?
2. Which capital structure yields the lowest likelihood of bankruptcy? What is that likelihood?
3. Which capital structure yields the lowest likelihood of a ratings downgrade? What is that likelihood?
4. Which capital structure would you recommend, why?
5. Do your answers change if the prices changed? Suppose the price of the cat bond goes up to $40M and the cost of reinsurance policy #2 fell to $85M. Re-answer questions 1 through 4 with the new prices.
6. What if 2016+ data were not included in the analysis, do your answers change?
a. Did the distributions change?
b. Re-answer questions 1 through 4 with the new data.
While doing the project, there are a few other questions you will need to answer:
1. Which frequency distribution did you pick? Why?
2. Which severity distribution did you pick? Why?
3. Some data is recorded for the years 2016+, but you question its accuracy. Is the data recorded for 2016-2023 accurate? Did you adjust the data recorded for 2016-2023(at a minimum you need to add 2019-2023 data)? How did you make adjustments to it? If so, did it change your answers?
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