Catastrophe risk management with counterparty risk using alternative instruments

Yang Che Wu*, San Lin Chung

*Corresponding author for this work

Research output: Contribution to journalJournal Article peer-review

23 Scopus citations

Abstract

Since weather-related disasters have an upward trend-cycle movement and the global financial crisis has revealed the severity of counterparty risk, this study reinvestigates and incorporates the catastrophe characteristics and counterparty risk into the valuation of catastrophe products. First, the excess of loss reinsurance is traditionally used to reduce catastrophe risk. Its premium is estimated under these catastrophe characteristics. Second, this paper looks into the price of catastrophe futures and spread option contracts that are based on a catastrophe index. The (re)insurer can apply these exchange-traded derivatives to reduce catastrophe risk without counterparty risk. Third, this paper takes counterparty risk into account to value catastrophe bonds and catastrophe equity puts. Thus, the fair valuations of these two instruments are revealed to the buyer.

Original languageEnglish
Pages (from-to)234-245
Number of pages12
JournalInsurance: Mathematics and Economics
Volume47
Issue number2
DOIs
StatePublished - 10 2010
Externally publishedYes

Keywords

  • Catastrophe reinsurance contracts
  • Catastrophe risk
  • Catastrophe-linked instruments

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