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Hybrid Cat-bonds

  • Pauline Barrieu

    (London School of Economics)

  • Henri Loubergé

    (University of Geneva and Swiss Finance Institute)

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.

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File URL: http://ssrn.com/abstract=1016028
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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-27.

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Length: 26 pages
Date of creation: Feb 2006
Date of revision: Sep 2007
Handle: RePEc:chf:rpseri:rp0727
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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