IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp0727.html
   My bibliography  Save this paper

Hybrid Cat-bonds

Author

Listed:
  • Pauline Barrieu

    (London School of Economics)

  • Henri Loubergé

    (University of Geneva and Swiss Finance Institute)

Abstract

Natural catastrophes attract regularly the attention of media and have become a source of public concern. From a financial viewpoint, natural catastrophes represent idiosyncratic risks, diversifiable at the world level. But for reasons analyzed in this paper reinsurance markets are unable to cope with this risk completely. Insurance-linked securities, such as cat bonds, have been issued to complete the international risk transfer process, but their development is disappointing so far. This paper argues that downside risk aversion and ambiguity aversion explain the limited success of cat bonds. Hybrid cat bonds, combining the transfer of cat risk with protection against a stock market crash, are proposed to complete the market. Using the concept of market modified risk measure, the paper shows that replacing simple cat bonds with hybrid cat bonds would lead to an increase in market volume.

Suggested Citation

  • Pauline Barrieu & Henri Loubergé, 2007. "Hybrid Cat-bonds," Swiss Finance Institute Research Paper Series 07-27, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0727
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=1016028
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Walter Kielholz & Alex Durrer, 1997. "Insurance Derivatives and Securitization: New Hedging Perspectives for the US Cat Insurance Market," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 22(1), pages 3-16, January.
    2. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 883-904.
    3. Paul K Freeman, 2001. "Hedging Natural Catastrophe Risk in Developing Countries," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 26(3), pages 373-385, July.
    4. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
    5. Barrieu, Pauline & El Karoui, Nicole, 2005. "Inf-convolution of risk measures and optimal risk transfer," LSE Research Online Documents on Economics 2829, London School of Economics and Political Science, LSE Library.
    6. Cummins, J. David & Lalonde, David & Phillips, Richard D., 2004. "The basis risk of catastrophic-loss index securities," Journal of Financial Economics, Elsevier, vol. 71(1), pages 77-111, January.
    7. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    8. Martin Nell & Andreas Richter, 2004. "Improving Risk Allocation Through Indexed Cat Bonds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 29(2), pages 183-201, April.
    9. Pauline Barrieu & Nicole El Karoui, 2005. "Inf-convolution of risk measures and optimal risk transfer," Finance and Stochastics, Springer, vol. 9(2), pages 269-298, April.
    10. Robert E. Hoyt & Kathleen A. McCullough, 1999. "Catastrophe Insurance Options: Are They Zero-Beta Assets?," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 22(2), pages 147-163.
    11. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. J. David Cummins & Mary A. Weiss, 2009. "Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk‐Transfer Solutions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 493-545, September.
    2. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    3. 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.
    4. Stylianos Perrakis & Ali Boloorforoosh, 2018. "Catastrophe futures and reinsurance contracts: An incomplete markets approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(1), pages 104-128, January.
    5. Gibson, Rajna & Habib, Michel A. & Ziegler, Alexandre, 2014. "Reinsurance or securitization: The case of natural catastrophe risk," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 79-100.
    6. Borensztein, Eduardo & Cavallo, Eduardo & Jeanne, Olivier, 2017. "The welfare gains from macro-insurance against natural disasters," Journal of Development Economics, Elsevier, vol. 124(C), pages 142-156.
    7. 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;Western Finance Association, vol. 44(3), pages 281-301, December.
    8. Marc Gürtler & Martin Hibbeln & Christine Winkelvos, 2016. "The Impact of the Financial Crisis and Natural Catastrophes on CAT Bonds," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(3), pages 579-612, September.
    9. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dimitrios G. Konstantinides & Georgios C. Zachos, 2019. "Exhibiting Abnormal Returns Under a Risk Averse Strategy," Methodology and Computing in Applied Probability, Springer, vol. 21(2), pages 551-566, June.
    2. Rose-Anne Dana & Cuong Le Van, 2009. "No-arbitrage, overlapping sets of priors and the existence of efficient allocations and equilibria in the presence of risk and ambiguity," Post-Print halshs-00281582, HAL.
    3. Thilini Mahanama & Abootaleb Shirvani & Svetlozar Rachev, 2022. "A Natural Disasters Index," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 24(2), pages 263-284, April.
    4. Harris, Richard D.F. & Nguyen, Linh H. & Stoja, Evarist, 2019. "Systematic extreme downside risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 128-142.
    5. Carlier Guillaume & Dana Rose-Anne, 2006. "Law invariant concave utility functions and optimization problems with monotonicity and comonotonicity constraints," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 1-26, July.
    6. Jocelyne Bion-Nadal, 2007. "Bid-Ask Dynamic Pricing in Financial Markets with Transaction Costs and Liquidity Risk," Papers math/0703074, arXiv.org.
    7. Daniel Lacker, 2018. "Liquidity, Risk Measures, and Concentration of Measure," Mathematics of Operations Research, INFORMS, vol. 43(3), pages 813-837, August.
    8. Jana Bielagk & Arnaud Lionnet & Gonçalo dos Reis, 2015. "Equilibrium pricing under relative performance concerns," Working Papers hal-01245812, HAL.
    9. repec:dau:papers:123456789/2342 is not listed on IDEAS
    10. Marcelo Brutti Righi & Marlon Ruoso Moresco, 2024. "Inf-convolution and optimal risk sharing with countable sets of risk measures," Annals of Operations Research, Springer, vol. 336(1), pages 829-860, May.
    11. Gustavo Silva Araújo & José Valentim Machado Vicente, 2014. "Indicadores Antecedentes Extraídos de Preços de Ativos em Corte Transversal," Working Papers Series 361, Central Bank of Brazil, Research Department.
    12. Wang, Ruodu & Wei, Yunran, 2020. "Characterizing optimal allocations in quantile-based risk sharing," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 288-300.
    13. Pal, Soumik, 2007. "Computing strategies for achieving acceptability: A Monte Carlo approach," Stochastic Processes and their Applications, Elsevier, vol. 117(11), pages 1587-1605, November.
    14. Rose-Anne Dana & Cuong Le Van, 2007. "Overlapping sets of priors and the existence of efficient allocations and equilibria for risk measures," Post-Print halshs-00188761, HAL.
    15. Stadje, M.A. & Pelsser, A., 2014. "Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086)," Discussion Paper 2014-002, Tilburg University, Center for Economic Research.
    16. Roorda, Berend & Schumacher, J.M., 2011. "The strictest common relaxation of a family of risk measures," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 29-34, January.
    17. Alfred Galichon & Ivar Ekeland & Marc Henry, 2009. "Comonotonic measures of multivariates risks," Working Papers hal-00401828, HAL.
    18. Rose-Anne Dana & Cuong Le Van, 2010. "Overlapping risk adjusted sets of priors and the existence of efficient allocations and equilibria with short-selling," Post-Print halshs-00470670, HAL.
    19. Hirbod Assa & Peng Liu, 2024. "Factor risk measures," Papers 2404.08475, arXiv.org.
    20. Svindland Gregor, 2009. "Subgradients of law-invariant convex risk measures on L," Statistics & Risk Modeling, De Gruyter, vol. 27(02), pages 169-199, December.
    21. Felix-Benedikt Liebrich & Gregor Svindland, 2018. "Risk sharing for capital requirements with multidimensional security markets," Papers 1809.10015, arXiv.org.

    More about this item

    Keywords

    Risk management; Risk transfer; Catastrophes; Risk measures; Reinsurance; Optimal design;
    All these keywords.

    JEL classification:

    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0727. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.