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Catastrophe risk management with counterparty risk using alternative instruments

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  • Wu, Yang-Che
  • Chung, San-Lin
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    Abstract

    Since weather-related disasters have an upward trend-cycle movement and the global financial crisis has revealed the severity of counterparty risk, this study reinvestigates and incorporates the catastrophe characteristics and counterparty risk into the valuation of catastrophe products. First, the excess of loss reinsurance is traditionally used to reduce catastrophe risk. Its premium is estimated under these catastrophe characteristics. Second, this paper looks into the price of catastrophe futures and spread option contracts that are based on a catastrophe index. The (re)insurer can apply these exchange-traded derivatives to reduce catastrophe risk without counterparty risk. Third, this paper takes counterparty risk into account to value catastrophe bonds and catastrophe equity puts. Thus, the fair valuations of these two instruments are revealed to the buyer.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 47 (2010)
    Issue (Month): 2 (October)
    Pages: 234-245

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    Handle: RePEc:eee:insuma:v:47:y:2010:i:2:p:234-245

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    Web page: http://www.elsevier.com/locate/inca/505554

    Related research

    Keywords: Catastrophe risk Catastrophe reinsurance contracts Catastrophe-linked instruments;

    References

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