Measuring Insurer Vulnerability to Catastrophe Risk

We develop an empirical measure of U.S. property-liability insurers’ vulnerability to catastrophe risk. Using underwriting outcomes and property damage data from 1991 to 2021, we first estimate state–line sensitivities that quantify how unexpected disaster damages translate into insured losses. Sensitivity varies widely across lines and states: homeowners and allied lines, and the Gulf and Southeastern states, show the strongest transmission. Loss ratios rise sharply in high-damage years, but decline only modestly in low-damage years. Combining sensitivities with insurers' portfolio compositions, we construct an insurer-level vulnerability metric and find that vulnerability is highly skewed. Insurers in the top quintile are roughly four times more exposed than the next group, and their vulnerability has grown by 50 percent over time. While most insurers manage catastrophe exposure through diversification, highly vulnerable insurers, typically smaller and concentrated, rely heavily on reinsurance. Our metric also reconciles prior evidence on diversification and reinsurance: while concentration lowers reinsurance demand on average, for vulnerable insurers, reinsurance usage increases with geographic concentration.