Decomposing catastrophic risk

It is examined how losses can be decomposed into two multiplicative compone nts, one independent among insureds and the other highly correlated. This i s done for both the severity of loss, and for the probability of a loss. As opposed to a common principle for the insurability of a loss, it is shown how a high degree of correlation in the nondiversifiable loss component act ually may be beneficial in facilitating alternative risk financing. (C) 199 8 Elsevier Science B.V. All rights reserved.