Hybrid Cat Bonds
AbstractNatural catastrophes attract regularly the media attention and have become a source of public concern. From a financial viewpoint, they represent idiosyncratic risks, diversifiable at the world level. But for various reasons, reinsurance markets are unable to cope with this risk completely. Insurance-linked securities, such as catastrophe (cat) bonds, have been issued to complete the international risk transfer process, but their development is disappointing so far. This article argues that downside risk aversion and ambiguity aversion explain their limited success. Hybrid cat bonds, combining the transfer of cat risk with protection against a stock market crash, are proposed to complete the market. The article shows that replacing simple cat bonds with hybrid cat bonds would lead to an increase in market volume. Copyright (c) The Journal of Risk and Insurance, 2009.
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Bibliographic InfoArticle provided by The American Risk and Insurance Association in its journal Journal of Risk and Insurance.
Volume (Year): 76 (2009)
Issue (Month): 3 ()
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- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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- Bjoern Hagendorff & Jens Hagendorff & Kevin Keasey, 2013. "The Shareholder Wealth Effects of Insurance Securitization: Preliminary Evidence from the Catastrophe Bond Market," Journal of Financial Services Research, Springer, vol. 44(3), pages 281-301, December.
- Lo, Chien-Ling & Lee, Jin-Ping & Yu, Min-Teh, 2013. "Valuation of insurers’ contingent capital with counterparty risk and price endogeneity," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5025-5035.
- Perrakis, Stylianos & Boloorforoosh, Ali, 2013. "Valuing catastrophe derivatives under limited diversification: A stochastic dominance approach," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3157-3168.
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