Convergence of Capital and Insurance Markets: Consistent Pricing of Index-Linked Catastrophic Loss Instruments
Gatzert N, Pokutta S, Vogl N (2019)
Publication Type: Journal article, Original article
Publication year: 2019
Journal
Book Volume: 86
Pages Range: 39-72
Journal Issue: 1
DOI: 10.1111/jori.12191
Abstract
Index-linked catastrophe loss instruments have become increasingly attractive for investors and play an important role in risk management. Their payout is tied to the development of an underlying industry loss index (reflecting losses from natural catastrophes) and may additionally depend on the ceding company's loss. Depending on the instrument, pricing is currently not entirely transparent and does not assume a liquid market. We show how arbitrage-free and market-consistent prices for such instruments can be derived by overcoming the crucial point of tradability of the underlying processes. We develop suitable approximation and replication techniques and-based on these-provide explicit pricing formulas using cat bond prices. Finally, we use empirical examples to illustrate the suggested approximations.
Authors with CRIS profile
Nadine Gatzert
Lehrstuhl für Versicherungswirtschaft und Risikomanagement
Nikolai Vogl
Lehrstuhl für Versicherungswirtschaft und Risikomanagement
Related research project(s)
Involved external institutions
United States (USA) (US)How to cite
APA:
Gatzert, N., Pokutta, S., & Vogl, N. (2019). Convergence of Capital and Insurance Markets: Consistent Pricing of Index-Linked Catastrophic Loss Instruments. Journal of Risk and Insurance, 86(1), 39-72. https://doi.org/10.1111/jori.12191
MLA:
Gatzert, Nadine, Sebastian Pokutta, and Nikolai Vogl. "Convergence of Capital and Insurance Markets: Consistent Pricing of Index-Linked Catastrophic Loss Instruments." Journal of Risk and Insurance 86.1 (2019): 39-72.
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