Jump to ContentJump to Main Navigation
Show Summary Details
More options …

Asia-Pacific Journal of Risk and Insurance

The Official Journal of the Asia-Pacific Risk and Insurance Association

Editor-in-Chief: Kwon, W. Jean

2 Issues per year

Online
ISSN
2153-3792
See all formats and pricing
More options …

Hedging Flood Losses Using Cat Bonds

Alexandre Têtu
  • Financial Markets Placements, Investments, General Funds, Industrial Alliance Insurance and Financial Services Inc., Quebec City, QC, Canada
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Van Son Lai
  • Department of Finance, Insurance and Real Estate, Faculty of Business Administration, Laval University, Quebec City, QC, Canada
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Issouf Soumaré
  • Corresponding author
  • Department of Finance, Insurance and Real Estate, Faculty of Business Administration, Laval University, Quebec City, QC, Canada
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Michel Gendron
  • Department of Finance, Insurance and Real Estate, Faculty of Business Administration, Laval University, Quebec City, QC, Canada
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2015-06-04 | DOI: https://doi.org/10.1515/apjri-2014-0024

Abstract

In this paper, we develop a methodology to model the risk of losses resulting from a natural disaster in which the intensity parameter of the non-homogeneous Poisson process has an upward trend and a seasonal component. We apply this model to losses due to floods in the Financial Assistance Program of the Government of Quebec (Canada). We use the historically observed risk premiums to assess the financial costs for the government if it had issued such instruments to hedge risk linked to floods.

Keywords: cat bond; catastrophe bond; catastrophe risk; floods; insurance; risk management; risk transfer; securitization

References

  • Anderson, T. W., and D. A. Darling. 1952. “Asymptotic Theory of Certain ‘Goodness of Fit’ Criteria Based on Stochastic Processes.” The Annals of Mathematical Statistics 23 (2):193–212.CrossrefGoogle Scholar

  • Bantwal, V., and H. Kunreuther. 1999. “A Cat Bond Premium Puzzle?” Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania.Google Scholar

  • Baryshnikov, Y., A. Mayo, and D. Taylor. 1999. “Pricing Cat Bonds.” Working Paper.Google Scholar

  • Bolder, D. J., G. Johnson, and A. Metzler. 2004. “An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates.” Working Paper, Bank of Canada.Google Scholar

  • Boyle, P., M. Broadie, and P. Glasserman. 1997. “Monte Carlo Methods for Security Pricing.” Journal of Economic Dynamics and Control 21 (8–9):1267–321.CrossrefGoogle Scholar

  • Braun, A. 2012. “Pricing in the Primary Market for Cat Bonds: New Empirical Evidence.” Working Papers on Risk Management and Insurance No. 116, University of St. Gallen.Google Scholar

  • Burnecki, K., J. Janczura, and R. Weron. 2011. “Building Loss Models.” In Statistical Tools for Finance and Insurance, edited by P. Cizek, W. K. Härdle, and R. Weron, 293–328. Springer-Verlag Berlin Heidelberg.Google Scholar

  • Cabrera, B. L., and W. K. Hardle. 2010. “Calibrating Cat Bonds for Mexican Earthquakes.” The Journal of Risk and Insurance 77 (3):625–50.Web of ScienceGoogle Scholar

  • Collins, D. J., and S. Lowe. 2001. “A Macro Validation Dataset for US Hurricane Model.” Casualty Actuarial Society, Winter Forum.Google Scholar

  • Constantin, L. 2011. “Portfolio Diversification through Structured Catastrophe Bonds Amidst the Financial Crisis.” Economic Sciences Series 63 (3):75–84.Google Scholar

  • Cummins, J. D. 2008. “Cat Bonds and Other Risk Linked Securities: State of the Market and Recent Developments.” Risk Management and Insurance Review 11 (1):23–47.CrossrefGoogle Scholar

  • Cummins, J. D., and H. Geman. 1995. “Pricing Catastrophe Insurance Futures and Call Spreads: An Arbitrage Approach.” Journal of Fixed Income 4:46–57.CrossrefGoogle Scholar

  • Dassios, A., and J.-W. Jang. 2003. “Pricing of Catastrophe Reinsurance and Derivatives Using the Cox Process with Shot Noise Intensity.” Finance and Stochastics 7:73–95.CrossrefGoogle Scholar

  • Duan, J., and M. Yu. 2005. “Fair Insurance Guaranty Premia in the Presence of Risk-Based Capital Regulations, Stochastic Interest Rate and Catastrophic Risk.” Journal of Banking & Finance 29 (10):2435–54.CrossrefGoogle Scholar

  • D’agostino, R., and M. Stephens. 1986. Goodness-of-Fit Techniques. New York: Marcel.Google Scholar

  • Embrechts, P., and S. Meister. 1997. “Pricing Insurance Derivatives, the Case of Cat Futures.” In Proceedings of the 1995 Bowles Symposium on Securitization of Risk, 15–26. Atlanta, GA: Georgia State University Atlanta: Society of Actuaries.Google Scholar

  • Froot, K. A. 2008. “The Intermediation of Financial Risks: Evolution in the Catastrophe Reinsurance Market.” Risk Management & Insurance Review 11 (2):281–94.CrossrefGoogle Scholar

  • Hainaut, D. 2012. “Seasonality Modeling for Catastrophe Bond Pricing.” Bulletin Francais D’actuariat 12 (23):129–50.Google Scholar

  • Ibragimov, R., D. Jaffee, and J. Walden. 2009. “Nondiversification Traps in Catastrophe Insurance Markets.” The Review of Financial Studies 22 (3):959–93.Web of ScienceCrossrefGoogle Scholar

  • Insurance Bureau of Canada (IBC). 2008. Facts of the General Insurance Industry in Canada.Google Scholar

  • Intergovernmental Panel on Climate Change Working Groups (IPCC). 2007. Climate Change: Synthesis Report.Google Scholar

  • Jarrow, R. A. 2010. “A Simple Robust Model for Cat Bond Valuation.” Finance Research Letters 7:72–9.CrossrefWeb of ScienceGoogle Scholar

  • Kortschak, D., and H. Albrecher. 2010. “An Asymptotic Expansion for the Tail of Compound Sums of Burr Distributed Random Variables.” Statistics and Probability Letters 80:612–20.CrossrefWeb of ScienceGoogle Scholar

  • Lane, M., and O. Mahul. 2008. “Catastrophe Risk Pricing: An Empirical Analysis.” Policy Research Working Paper Series, The World Bank.Google Scholar

  • Li, X. 2007. “A Novel Accurate Approximation Method of Lognormal Sum Random Variables.” M.Sc. thesis, Wright State University.Google Scholar

  • Lin, S.-K., C.-C. Chang, and M. R. Powers. 2009. “The Valuation of Contingent Capital with Catastrophe Risks.” Insurance: Mathematics and Economics 45:65–73.Web of ScienceGoogle Scholar

  • Litzenberger, R. H., D. R. Beaglehole, and C. E. Reynolds. 1996. “Assessing Catastrophe Reinsurance-Linked Securities as a New Asset Class.” Journal of Portfolio Management 23:76–86.Google Scholar

  • Louberge, H., E. Kellezi, and M. Gilli. 1999. “Using Catastrophe-Linked Securities to Diversify Insurance Risk – A Financial Analysis of Cat Bonds.” Journal of Insurance Issues 22 (2):125–46.Google Scholar

  • Ma, Z.-G., and C.-Q. Ma. 2013. “Pricing Catastrophe Risk Bonds: A Mixed Approximation Method.” Insurance: Mathematics and Economics 52:243–54.Web of ScienceGoogle Scholar

  • Merton, R. 1976. “Option Prices When Underlying Stock Returns Are Discontinuous.” Journal of Financial Economics 3:125–44.CrossrefGoogle Scholar

  • Nowak, P., and M. Romaniuk. 2013. “Pricing and Simulations of Catastrophe Bonds.” Insurance: Mathematics and Economics 52:18–28.Web of ScienceGoogle Scholar

  • Ramsay, C. M. 2006. “The Distribution of Sums of Certain I.I.D. Pareto Variates.” Communications in Statistics – Theory and Methods 35 (3):395–405.CrossrefGoogle Scholar

  • Sandink, D., P. Kovacs, G. Oulahen, and G. Mcgillivray. 2010. “Making Flood Insurable for Canadian Homeowners.” Discussion Paper, Swiss RE.Google Scholar

  • Wang, S. 2004. “Cat Bond Pricing Using Probability Transforms.” Geneva Papers: Etudes et Dossiers, special issue on “Insurance and the State of the Art Cat Bond Pricing” No. 278, 19–29.Google Scholar

About the article

Published Online: 2015-06-04

Published in Print: 2015-07-01


Funding: The authors acknowledge the financial support received from the Fonds Conrad Leblanc, the Industrielle-Alliance Chair in Insurance and Financial Services, the Institut de Finance Mathématique of Montréal (IFM2) and the Social Sciences and Humanities Research Council of Canada.


Citation Information: Asia-Pacific Journal of Risk and Insurance, Volume 9, Issue 2, Pages 149–184, ISSN (Online) 2153-3792, ISSN (Print) 2194-606X, DOI: https://doi.org/10.1515/apjri-2014-0024.

Export Citation

©2015 by De Gruyter.Get Permission

Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

[1]
Denis-Alexandre Trottier and Van Son Lai
The Journal of Fixed Income, 2017, Volume 27, Number 2, Page 65
[2]
Jia Shao, Athanasios A. Pantelous, Bilal M. Ayyub, Stephen Chan, and Saralees Nadarajah
ASCE-ASME Journal of Risk and Uncertainty in Engineering Systems, Part A: Civil Engineering, 2017, Volume 3, Number 4, Page 04017018

Comments (0)

Please log in or register to comment.
Log in