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Do Insurers in Catastrophe-Prone Regions Buy Enough Reinsurance?
To protect themselves from catastrophic losses, insurance companies buy insurance, in the same way that people do. These contracts are called reinsurance agreements, and come in two main forms: proportional and nonproportional contracts. In proportional reinsurance contracts, a reinsurer agrees to repay a fixed proportion of losses incurred by the primary insurer. The simplicity of the agreement makes these types of contracts inexpensive and easy to administer. Therefore, they can be ideal risk-management tools for small insurance companies.