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Providing Pandemic Business Interruption Coverage with Double Trigger Cat Bonds

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  • André Schmitt
  • Sandrine Spaeter

Abstract

The aim of this paper is to show whether the insurance and reinsurance sectors supplemented by qualified investors in cat bonds can offer business interruption protection due to a pandemic such as COVID-19 at affordable rates. First, we propose a comprehensive numerical model to show how cat bonds can contribute to complement standard (re)insurance even though risks are positively correlated between different firms or sectors. We present the conditions under which fairer coverage can be provided to insured firms. Second, we discuss the characteristics of the triggers that are needed to provide efficient pandemic business interruption cat bonds (PBI cat bonds), which do not exist yet on the market of insurancelinked securities (ILS). The double trigger pandemic bonds we build are structured on a first trigger which is pulled when the World Health Organization (WHO) declares a Public Health Emergency of International Concern (PHEIC). The second trigger determines the payout of the bond based on the modelized business interruption losses of an industry in a country. In this framework, we discuss moral hazard, basis risk, correlation and liquidity issues. Third, to answer the feasibility of our (two-layer) coverage scheme we simulate the life of theoretical PBI bonds at the height of the pandemic. We apply them to the restaurant industry in France and we use data gathered during the COVID-19 pandemic.

Suggested Citation

  • André Schmitt & Sandrine Spaeter, 2022. "Providing Pandemic Business Interruption Coverage with Double Trigger Cat Bonds," Working Papers of BETA 2022-05, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2022-05
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    File URL: http://beta.u-strasbg.fr/WP/2022/2022-05.pdf
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    References listed on IDEAS

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    1. Alexis Louaas & Pierre Picard, 2023. "A pandemic business interruption insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 48(1), pages 1-30, March.
    2. Olivier Mahul & Brian Davern Wright, 2004. "Implications of incomplete performance for optimal insurance," Post-Print hal-01952109, HAL.
    3. Robert Hartwig & Greg Niehaus & Joseph Qiu, 2020. "Insurance for economic losses caused by pandemics," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 45(2), pages 134-170, September.
    4. Andreas Richter & Thomas C. Wilson, 2020. "Covid-19: implications for insurer risk management and the insurability of pandemic risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 45(2), pages 171-199, September.
    5. L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
    6. Helmut Gründl & Danjela Guxha & Anastasia Kartasheva & Hato Schmeiser, 2021. "Insurability of pandemic risks," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(4), pages 863-902, December.
    7. Olivier Mahul & Brian D. Wright, 2004. "Implications of Incomplete Performance for Optimal Insurance," Economica, London School of Economics and Political Science, vol. 71(284), pages 661-670, November.
    8. Sandrine Spaeter, 2021. "How to Reconcile Pandemic Business Interruption Risk With Insurance Coverage," Working Papers of BETA 2021-18, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    9. Olivier Mahul, 2003. "Efficient risk sharing within a catastrophe insurance pool," Post-Print hal-01952094, HAL.
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    Cited by:

    1. André Schmitt & Sandrine Spaeter, 2022. "Pandémie et couverture des pertes d’exploitation : l’investisseur aux côtés de l’assureur et de l’Etat," Working Papers of BETA 2022-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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    More about this item

    Keywords

    pandemic cat bond; business interruption losses; securitization; (re)insurance.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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