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When Should a CAT Index Futures Be Created?

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  • Kazuhiko Ohashi

Abstract

Traditionally, insurance risks are borne in reinsurance markets. In 1990s, however, after the sequence of huge natural disasters and huge insurance payments, the reinsurance markets reduced its capability to bear risks, especially those related to catastrophic natural disasters. Catastrophe- Linked Securities (CLS) were invented in order to fill the need for additional reinsurance capacity by transferring insurance risks to the capital markets. The CAT (catastrophe) index futures is one of the several types of CLS's. This paper investigates conditions under which the index derivatives, such as the CAT index futures, of the insurance risks can be traded by the non-insurance investors and is beneficial from the insurers' and the exchange's viewpoints.

Suggested Citation

  • Kazuhiko Ohashi, 2003. "When Should a CAT Index Futures Be Created?," ISER Discussion Paper 0576, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0576
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2003/DP0576.pdf
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    References listed on IDEAS

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    1. Bhattacharya Utpal & Reny Philip J. & Spiegel Matthew, 1995. "Destructive Interference in an Imperfectly Competitive Multi-Security Market," Journal of Economic Theory, Elsevier, vol. 65(1), pages 136-170, February.
    2. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
    3. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, March.
    4. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    5. John Major, 1999. "Index Hedge Performance: Insurer Market Penetration and Basis Risk," NBER Chapters, in: The Financing of Catastrophe Risk, pages 391-432, National Bureau of Economic Research, Inc.
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