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Securitization of catastrophe mortality risks

  • Lin, Yijia
  • Cox, Samuel H.
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    Securitization with payments linked to explicit mortality events provides a new investment opportunity to investors and financial institutions. Moreover, mortality-linked securities provide an alternative risk management tool for insurers. As a step toward understanding these securities, we develop an asset pricing model for mortality-based securities in an incomplete market framework with jump processes. Our model nicely explains opposite market outcomes of two existing pure mortality securities.

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    File URL: http://www.sciencedirect.com/science/article/B6V8N-4P718HN-2/2/362b23783040625bb82d672187b261a3
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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 42 (2008)
    Issue (Month): 2 (April)
    Pages: 628-637

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    Handle: RePEc:eee:insuma:v:42:y:2008:i:2:p:628-637
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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    1. Vivek J. Bantwal & Howard C. Kunreuther, 1999. "A Cat Bond Premium Puzzle?," Center for Financial Institutions Working Papers 99-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," Center for Financial Institutions Working Papers 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Sithole, Terry Z. & Haberman, Steven & Verrall, Richard J., 2000. "An investigation into parametric models for mortality projections, with applications to immediate annuitants' and life office pensioners' data," Insurance: Mathematics and Economics, Elsevier, vol. 27(3), pages 285-312, December.
    4. Alex Cowley & J. David Cummins, 2005. "Securitization of Life Insurance Assets and Liabilities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 193-226.
    5. Neil A. Doherty, 1997. "Financial Innovation in the Management of Catastrophe Risk," Center for Financial Institutions Working Papers 98-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
    7. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, vol. 29(3), pages 299-318, December.
    8. Kenneth A. Froot, 2007. "Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 273-299.
    9. J. David Cummins & Neil A. Doherty & Anita Lo, 1999. "Can Insurers Pay for the "Big One"? Measuring the Capacity of an Insurance Market to Respond to Catastrophic Losses," Center for Financial Institutions Working Papers 98-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Michael S. Canter & Joseph B. Cole & Richard L. Sandor, 1997. "Insurance Derivatives: A New Asset Class for the Capital Markets and a New Hedging Tool for the Insurance Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(3), pages 69-81.
    11. Minton, Bernadette & Sanders, Anthony & Strahan, Philip E., 2004. "Securitization by Banks and Finance Companies: Efficient Financial Contracting or Regulatory Arbitrage?," Working Paper Series 2004-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    12. Yijia Lin & Samuel H. Cox, 2005. "Securitization of Mortality Risks in Life Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 227-252.
    13. Kenneth A. Froot & Paul G. J. O'Connell, 1997. "On The Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance," NBER Working Papers 6011, National Bureau of Economic Research, Inc.
    14. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    15. Neil A. Doherty, 1997. "Financial Innovation in the Management of Catastrophe Risk," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(3), pages 84-95.
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