Due to an increasing risk of extreme losses caused by value concentration and climate change as well as due to a limited (and volatile) capacity of traditional reinsurance and retrocession markets. Against this background, Alternative risk transfer (ART) intends to provide additional (re)insurance coverage by transferring insurance risks to the capital market, which offers considerably higher capacities and can thus help satisfying the demand. catastrophe risk bonds are by far the most successful and importantART financial innovation,hence have large potential in China. Intergovernmental Panel on Climate Change (IPCC)(2013) projections of more frequent and more intense extreme weather events in the 21st century and the occurrence and severity of abnormal climate change presents an irregular cycle with an upward trend. To capture the two catastrophic characteristics, a doubly stochastic Poisson process with Black DermanToy(BDT) intensity is proposed to model the arrival process for catastrophic risk events. The empirical results reveal the BDT arrival rate process is superior to the mean-reverting arrival process due to its larger E and d, and smaller RMSE, MAE and U. Second,to depict extreme features of catastrophic risks, the Block Maxima Method(BMM) in extreme value theory(EVT) is adopted to characterize the tail characteristics of catastrophic risk loss distribution. And then the loss distribution is analyzed and assessed using the graphics technology, the goodness-of-fit test, and model evaluation, it is found that the Generalized Extreme Value(GEV) distribution is the best fit. Furthermore, a pricing formula is derived for catastrophe bonds in a stochastic interest rates environment with the losses following a compound doubly stochastic Poisson process using risk-neutralized measure method. Next, the parameters of the pricing model are estmated and calibrated using the catastrophe loss data provided by the Property Claim Services(PCS) Unit of the Insurance Service Office(ISO) from 1985 to 2010 and 12-Month London Interbank Offered Rate (LIBOR) based on U.S. Dollar. Finally, simulation results verify our model predictions and demonstrate how financial risks and catastrophic risks affect the prices of catastrophe bonds.
MA Zong-gang, ZOU Xin-yue, MA Chao-qun
. Pricing Catastrophe Bonds under the Doubly Stochastic Compound Poisson Losses and Numerical Simulation[J]. Chinese Journal of Management Science, 2016
, 24(10)
: 35
-43
.
DOI: 10.16381/j.cnki.issn1003-207x.2016.10.004
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