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Providing pandemic business interruption coverage with double trigger cat bonds

Author

Listed:
  • André Schmitt

    (BETA, Université de Strasbourg, CNRS)

  • Sandrine Spaeter

    (BETA, Université de Strasbourg, CNRS)

Abstract

The aim of this paper is to show how qualified investors in cat bonds can offer adequate pandemic business interruption protection in a comprehensive public–private coverage scheme. First, we propose a numerical model to expose how cat bonds can contribute to complement standard re/insurance by improving coverage of cedents even though risks are positively correlated during a pandemic. Second, we introduce double trigger pandemic business interruption cat bonds, which we name PBI bonds, and discuss their precise characteristics to provide efficient coverage. A first trigger should be pulled when the World Health Organization declares a Public Health Emergency of International Concern (PHEIC). The second trigger determines the payout of the bond based on the modelised business interruption losses of an industry in a country. We discuss moral hazard, basis risk, correlation and liquidity issues which are critical in the context of a pandemic. Third, we simulate the life of theoretical PBI bonds in the restaurant industry in France by using data gathered during the COVID-19 pandemic.

Suggested Citation

  • André Schmitt & Sandrine Spaeter, 2023. "Providing pandemic business interruption coverage with double trigger cat bonds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(3), pages 687-713, July.
    • Handle: RePEc:pal:gpprii:v:48:y:2023:i:3:d:10.1057_s41288-023-00299-5
    DOI: 10.1057/s41288-023-00299-5
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    References listed on IDEAS

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    Cited by:

    1. Ciardiello, Francesco & Di Lorenzo, Emilia & Menzietti, Massimiliano & Sibillo, Marilena, 2024. "Securitization for common health," Socio-Economic Planning Sciences, Elsevier, vol. 93(C).

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