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Catastrophe Insurance Options: Are They Zero-Beta Assets?

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  • Robert E. Hoyt
  • Kathleen A. McCullough
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    Abstract

    PCS Catastrophe Insurance Options were released in 1995 as a means of providing property and casualty insurers with a method of hedging catastrophe exposures. The options are based on the Property Claims Services Office (PCS) index of catastrophe losses. Due to the fact that the underlying index is uncorrelated to movements in the capital markets, it is believed that PCS Catastrophe Insurance Options represent zero-beta assets. If this is true, then investment in catastrophe options provides investors with a way to further diversify the current asset portfolios, thereby improving portfolios’ reward-to-variability ratios. This study reviews actual PCS Catastrophe Insurance Options performance to assess whether the hypothesis that these contracts represent zero-beta assets is supported. In spite of relatively low liquidity in this market thus far, our results do suggest that the actual contracts do represent zero-beta assets.

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    Bibliographic Info

    Article provided by Western Risk and Insurance Association in its journal Journal of Insurance Issues.

    Volume (Year): 22 (1999)
    Issue (Month): 2 ()
    Pages: 147-163

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    Handle: RePEc:wri:journl:v:22:y:1999:i:2:p:147-163

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    Cited by:
    1. John Lewis, 2010. "Reinsurers as financial intermediaries in the market for catastrophic risk," DNB Occasional Studies 802, Netherlands Central Bank, Research Department.
    2. Darius Lakdawalla & George Zanjani, 2006. "Catastrophe Bonds, Reinsurance, and the Optimal Collateralization of Risk-Transfer," NBER Working Papers 12742, National Bureau of Economic Research, Inc.
    3. Chang, Carolyn W. & Chang, Jack S.K. & Lu, WeLi, 2010. "Pricing catastrophe options with stochastic claim arrival intensity in claim time," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 24-32, January.
    4. Vaugirard, Victor E., 2003. "Pricing catastrophe bonds by an arbitrage approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 119-132.

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