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Correlations Between Large WC
Losses and Other Key Model
Features
Economic changes that affect assets will change WC losses:
 Severities rise with inflation (double whammy
here)
NPV is related to real interest rates
But loss occurrences can affect the economy, too!
Example: 1906 San Francisco Earthquake
The U.S. stopped being the leading exporter
of gold and became a net importer
Interest rates rase from 3.5% to 4%
By the time the East Coast learned about the
final amount of damage from fire following,
the DJIA lost 9% of its value
Terrifying surges in trading volumes
Issues from the Current Market
Large deductibles:
- Credit Risk
- Aggregate Excess losses
- Less credibility in SWP as
reinsurance rating base
Must consider competition:
- Direct loss ratios
- Reinsurance costs, too
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