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European Windstorm – Correlation Issues

Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are Markowitz diversification, the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. This theory can be extended to natural catastrophe property reinsurance to enable reinsurers to develop efficient portfolios of risk. The EQECAT Eurowind® model incorporates more event simulations and the latest statistical techniques to produce a natural catastrophe model that correctly mimics the physical properties of windstorms in Europe which is the foremost component in developing an efficient portfolio.

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