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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.