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Catastrophic risks and the pricing of catastrophe equity put options

Massimo Arnone, Michele Leonardo Bianchi, Anna Grazia Quaranta, Gian Luca Tassinari
2021 Computational Management Science  
In this paper, after a review of the most common financial strategies and products that insurance companies use to hedge catastrophic risks, we study an option pricing model based on processes with jumps  ...  Given the importance that catastrophe equity put options (CatEPuts) have in this context, we introduce a pricing approach that provides not only a theoretical contribution whose applicability remains confined  ...  The views expressed in this article are those of the authors and do not necessarily reflect those of the Bank of Italy.  ... 
doi:10.1007/s10287-021-00391-y fatcat:kamhlisiyvdbdfiojdnpm6mefu

Innovations in Managing Catastrophe Risk

Neil A. Doherty
1997 Journal of Risk and Insurance  
But the stage has been set for an unbundling of insurance products with insurers retaining marketing underwriting and settlement services and risk bearing by-passing the reinsurance industry and being  ...  The arrival of the modelers and their models is eroding the comparative information advantage of insurers and reinsurers and opening the door to new players.  ...  The market value of the post-loss equity sold to the counter-party will be less than its purchase price under the put option if the option is in the money.  ... 
doi:10.2307/253893 fatcat:4lj4m6uhcvfydjylmo4mhwurhu

Financial Innovation in the Management of Catastrophe Risk

Neil A. Doherty
1997 Journal of Applied Corporate Finance  
But the stage has been set for an unbundling of insurance products with insurers retaining marketing underwriting and settlement services and risk bearing by-passing the reinsurance industry and being  ...  The arrival of the modelers and their models is eroding the comparative information advantage of insurers and reinsurers and opening the door to new players.  ...  The market value of the post-loss equity sold to the counter-party will be less than its purchase price under the put option if the option is in the money.  ... 
doi:10.1111/j.1745-6622.1997.tb00149.x fatcat:x5exigq4jnayvcgzu27b4ydtwy

Valuation of insurers' contingent capital with counterparty risk and price endogeneity

Chien-Ling Lo, Jin-Ping Lee, Min-Teh Yu
2013 Journal of Banking & Finance  
Our results on the focal contingent capital instrument -catastrophe equity put option (CatEPut) -indicate that prices can be significantly overestimated without considering CR and be significantly underestimated  ...  to value insurers' contingent capital with counterparty risk (CR) and overcomes the problem of price endogeneity (PE) in the valuation model.  ...  The authors would like to express their sincere gratitude to the National Science Council of Taiwan for the financial support provided for this study.  ... 
doi:10.1016/j.jbankfin.2013.09.007 fatcat:ow2rlvxmpbavldthxgc6xkd2kq

A Well-Designed Implement for Promoting Population Health and Property via Insurance

Zhengqiao Liu, Li Zhao, Yang-Che Wu, Ming-Che Chuang, Mei-Chih Wang
2022 Frontiers in Public Health  
The frequency and intensity of catastrophes (including natural disasters and pandemics) rise and damage the population's health, life and property more seriously.  ...  We analyze the changes in catastrophic insurer's capital structures under three cases of that the volume-based charges to the PCIS may come from equity holders or policyholders or both.  ...  t E Q [(A t -L t ) + ], corresponds to the value of the put option with underlying price A t and strike price L t .  ... 
doi:10.3389/fpubh.2021.766003 pmid:35174131 pmcid:PMC8841659 fatcat:7ffbulxvzrce7oi3p44qdn435m

Pricing of Catastrophe Risk and the Implied Volatility Smile

Semir Ben Ammar
2016 Social Science Research Network  
This paper analyzes the relation between catastrophe risk and the implied volatility smile of insurance stock options.  ...  We are able to link the insurance-specific tail risk component derived from options with the risk spread from catastrophe bonds.  ...  This price dynamic is known as the reinsurance cycle and a well-known phenomenon for increasing reinsurance prices after catastrophes to make up for the incurred losses. This pricing com-  ... 
doi:10.2139/ssrn.2827585 fatcat:k5dyf4uzs5aj5mdy22m4mio5rm

The Theory of Catastrophe Risk Financing: A Look at the Instruments that Might Transform the Insurance Industry

Stanley Mutenga, Sotiris K Staikouras
2007 Geneva papers on risk and insurance. Issues and practice  
Taken all together, the intention is that risk financing should be able to release assets committed to liabilities, and should reduce the cost of risk capital in sponsoring all-purpose equity.  ...  The current study reviews the risk financing techniques employed in the insurance markets and looks at the changing field of the risk management arena.  ...  (Catastrophic equity puts).  ... 
doi:10.1057/palgrave.gpp.2510127 fatcat:eoqf43uur5gefko3uv5suecgvq

Catastrophe options with stochastic interest rates and compound Poisson losses

Sebastian Jaimungal, Tao Wang
2006 Insurance, Mathematics & Economics  
We analyze the pricing and hedging of catastrophe put options under stochastic interest rates with losses generated by a compound Poisson process.  ...  We obtain explicit closed form formulae for the price of the option, and the hedging parameters Delta, Gamma and Rho.  ...  Acknowledgements The authors thank Sheldon X. Lin and an anonymous referee for useful comments and suggestions which ultimately enhanced the presentation of the paper.  ... 
doi:10.1016/j.insmatheco.2005.11.008 fatcat:jl2oe2seirerjnwlvgt3oixrai

Risk transfer solutions for the insurance industry

Vladimir Njegomir, Rado Maksimovic
2009 Ekonomski Anali  
The paper focuses on the traditional and alternative mechanisms for insurance risk transfer that are available to global as well as to domestic insurance companies.  ...  The findings suggest that traditional insurance risk transfer solutions available to insurance industry nowadays will be predominant in the foreseeable future but the increasing role of alternative solutions  ...  This puts enable insurers and reinsurers to raise capital by issuing equities at a pre-agreed price after the occurrence of the catastrophic event.  ... 
doi:10.2298/eka0980057n fatcat:lpnobuhulneufgx2gngej2dvka

On the Relative Pricing of Long-Maturity Index Options and Collateralized Debt Obligations

PIERRE COLLIN-DUFRESNE, ROBERT S. GOLDSTEIN, FAN YANG
2012 Journal of Finance  
We investigate a structural model of market and firm-level dynamics in order to jointly price long-dated S&P 500 options and tranche spreads on the five-year CDX index.  ...  We demonstrate the importance of calibrating the model to match the entire term structure of CDX index spreads because it contains pertinent information regarding the timing of expected defaults and the  ...  This is because the strike prices of traded options do not span far enough in the moneyness dimension to identify the (risk neutral) probabilities of catastrophic crashes.  ... 
doi:10.1111/j.1540-6261.2012.01779.x fatcat:ean7wtnmn5h25kc46gfgsauthq

Valuation of contingent convertible catastrophe bonds - the case for equity conversion [article]

Krzysztof Burnecki, Mario Nicoló Giuricich, Zbigniew Palmowski
2018 arXiv   pre-print
We begin with a discussion of its design and compare its relative merits to catastrophe bonds and catastrophe-equity puts.  ...  Subsequently, we derive analytical valuation formulae for index-linked CocoCats under the assumption of independence between natural catastrophe and financial markets risks.  ...  Acknowledgments We are extremely grateful for the input of and insights offered by Peter Ouwehand as well as David Taylor  ... 
arXiv:1804.07997v1 fatcat:ndz3xyu7ojcqnh2cs2cn73s76u

Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk-Transfer Solutions

J. David Cummins, Mary A. Weiss
2009 Journal of Risk and Insurance  
Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re)insurance underwriting cycles, advances in computing and communications  ...  technologies, the emergence of enterprise risk management, and other factors.  ...  An early contingent capital transaction, issued over-the-counter by Aon Corporation, was called a "CAT-E-Put," an abbreviation for "catastrophic equity put option."  ... 
doi:10.1111/j.1539-6975.2009.01311.x fatcat:p6ex63plxzfz3mmvt6kinwkofa

SECURITIZATION AS AN ALTERNATIVE WAY OF MANAGING THE RISK OF CATASTROPHIC EVENTS

Mirela Mitrašević
2019 НОВИ ЕКОНОМИСТ  
For thisreason insurers have sought alternative ways ofcovering these extreme losses, and one of them, atransfer of the risk of insurance to the capitalmarkets represents the main subject of thisresearch  ...  The lack of available coverage ofthese risks in the market, due to the insolvency orunwillingness of insurers to ensure catastrophicevents, can significantly impede the economicrecovery and development  ...  Catastrophe equity puts are structured in the form of a path option that allows an insurer to sell an investor's share in share capital at pre-agreed prices when catastrophic damage exceeds the level defined  ... 
doi:10.7251/noe1824024m fatcat:4qgjzfzhebglvmgkl27aogsbja

Should the Government Provide Insurance for Catastrophes?

J. David Cummins
2006 Review  
Catastrophic events, and particularly mega-catastrophes such as Katrina and the WTC terrorist attack, violate to some degree nearly all of the standard conditions for insurability.  ...  The increasing costs of catastrophes have significantly stressed insurance markets.  ...  Besides the Chicago Board of Trade options and CAT bonds, other capital market solutions to the problem of financing catastrophic loss have been introduced, including catastrophe equity puts (Cat-E-Puts  ... 
doi:10.20955/r.88.337-380 fatcat:6fxmv2mz5rcf3ckvfhfawakeyq

Catastrophe risk management with counterparty risk using alternative instruments

Yang-Che Wu, San-Lin Chung
2010 Insurance, Mathematics & Economics  
Second, this paper looks into the price of catastrophe futures and spread option contracts that are based on a catastrophe index.  ...  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.  ...  Since the literature seldom simultaneously take mean reversion and credit contagion into the risk management and pricing model, this article uses the model to re-estimate catastrophe insurance contracts  ... 
doi:10.1016/j.insmatheco.2010.04.002 fatcat:il2uft4frbb6bgm4wtr62sr4i4
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