Analysis of the Smoothing Ability of CAT Bond
Date Issued
2005
Date
2005
Author(s)
Chao, Shu-Ting
DOI
zh-TW
Abstract
The major difference between the catastrophe insurance and other insurable risks is that the annual pattern of catastrophe risk is highly variable. Therefore, the insurance companies encounter the problem of smoothing out surplus. Solving the fundamental problem of the mismatch between the size of annual premiums and the much larger size of possible catastrophe losses becomes the most important task that managers have to handle.
This article aims to find an effective way that can smooth the surplus of the insurance company. First, we analysis whether using the Cat bond can work out the problem and can minimum the volatility of average surplus. Then we further compare the smoothing ability of catastrophe-linked bonds and catastrophe convertible bonds. Finally, we conduct a sensitivity analysis. This allows us to understand the variables related to influencing the prices and smoothing ability of different kind of Cat Bonds.
From the simulation, we realize the following results. First, issuing the Cat Bond can get the better smoothing effect than do not issuing the Cat Bond. It follows the conclusion of Jaffee and Russell (1997). Second, catastrophe-convertible bonds smooth surplus better than catastrophe-linked bonds. Even varying the related variable will not change this phenomenon. Finally, the price of catastrophe-convertible bonds is larger than catastrophe-linked bonds. It means if the insurance company issue catastrophe-convertible bonds, it will get more from the investor.
To comprehensive the above results, we think the catastrophe-convertible bonds have the chance to take the place of the traditional catastrophe-linked bonds.
Subjects
巨災債券
利潤平滑
評價
CatBond
Smoothing
Valuation
Type
thesis
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