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Calibrating CAT Bonds for Mexican Earthquakes

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  • Wolfgang Karl Härdle
  • Brenda López Cabrera

Abstract

This article examines the calibration of a real parametric catastrophe bond (CAT bond) for earthquakes sponsored by the Mexican government, which is of a high interest as it delivers several policy-relevant findings. The results demonstrate that a combination of reinsurance and CAT bond is optimal in the sense that it provides coverage for a lower cost and lower exposure at default than reinsurance itself. A hybrid CAT bond for earthquakes is also priced in order to reduce the basis and moral risk borne by the sponsor and to reflect the value of the loss by several variables. Copyright (c) The Journal of Risk and Insurance, 2010.

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Bibliographic Info

Article provided by The American Risk and Insurance Association in its journal Journal of Risk and Insurance.

Volume (Year): 77 (2010)
Issue (Month): 3 ()
Pages: 625-650

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Handle: RePEc:bla:jrinsu:v:77:y:2010:i:3:p:625-650

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References

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  1. Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
  2. Burnecki, Krzysztof & Weron, Rafal, 2010. "Simulation of Risk Processes," MPRA Paper 25444, University Library of Munich, Germany.
    • Härdle, Wolfgang Karl & Burnecki, Krzysztof & Weron, Rafał, 2004. "Simulation of risk processes," Papers 2004,01, Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE).
  3. Krzysztof Burnecki & Grzegorz Kukla & Rafal Weron, 2000. "Property insurance loss distributions," HSC Research Reports HSC/00/03, Hugo Steinhaus Center, Wroclaw University of Technology.
  4. Burnecki, Krzysztof & Misiorek, Adam & Weron, Rafal, 2010. "Loss Distributions," MPRA Paper 22163, University Library of Munich, Germany.
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Cited by:
  1. Volodymyr Perederiy, 2007. "Kombinierte Liquiditäts- und Solvenzkennzahlen und ein darauf basierendes Insolvenzprognosemodell für deutsche GmbHs," SFB 649 Discussion Papers SFB649DP2007-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Joanne Ho & Martin Odening, 2009. "Weather-based estimation of wildfire risk," SFB 649 Discussion Papers SFB649DP2009-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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