Alternative to Insurance Risk Transfer: Creating a catastrophe bond for Romanian earthquakes

Kiohos, Apostolos; Paspati, Maria

doi:10.47260/bae/811

Cited by 6 publications

(5 citation statements)

References 12 publications

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“…The payoff function depends on the trigger condition that occurs. In previous studies, the payoff function on Cat Bond was modelled in the form of a binary linear function [12,18,20,23,25,33,42] and piecewise linear function [20,23,33,48]. In the proposed model, the payoff function model uses piecewise linear because it can better describe the damage conditions caused by the earthquake.…”

Section: Decb Payoff Functionmentioning

confidence: 99%

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Decomposition of Disaster Region using Earthquake Parameter and STDM Distance: Catastrophe Bond Pricing Single Period

Wulan Anggraeni,

Sudradjat Supian,

Sukono

et al. 2024

ARASET

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Investor interest in single-regional earthquake catastrophe bonds has the potential to decline in the future. To pique investor interest, disaster bond prices can be determined by decomposed disaster zones using seismic parameters and Space Time Depth Magnitude (STDM) distance. Therefore, this study aims to develop a Decomposition of Disaster Region Using Earthquake Parameters and STDM Distance on the Earthquake Catastrophe Bond Pricing (DECBP) model for a single period. The basic idea of developing the model is to observe earthquake characteristics in an area by clustering the area based on the Earthquake Disaster Risk Index (EDRI), earthquake parameters (earthquake magnitude and depth), and STDM distance. The research and development (R&D) methodology used in this work is pursued through the creation of a mathematical model for calculating the price of earthquake catastrophe bonds over a single period. The development stages carried out are regional decomposition modelling, payment functions modelling, distribution of extreme earthquake magnitude values modelling, prediction of interest rates and coupons, numerical simulations, and analysis of the effect of interest rates, coupons, and the amount of regional decomposition on earthquake bond prices. Interest rates, coupons, and the number of regional decompositions that affect bond prices for earthquake events are the results of the analysis of the model that's been developed. The resulting model in this study is expected to assist the Super Purpose Vehicle (SPV) in determining the price of earthquake bonds and serve as a reference for future researchers developing models for the price of earthquake catastrophe bonds.

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Section: Decb Payoff Functionmentioning

confidence: 99%

“…The methods used are CIR to model coupons; The Maxima block is used to select the maximum annual earthquake magnitude; GEV is used to model the distribution of the magnitude of the annual earthquake disaster. Kiohos and Paspati [20] used a model similar to Zimbidis et al, [48]. However, the territory used in Romania.…”

Section: Introductionmentioning

confidence: 99%

Decomposition of Disaster Region using Earthquake Parameter and STDM Distance: Catastrophe Bond Pricing Single Period

Wulan Anggraeni,

Sudradjat Supian,

Sukono

et al. 2024

ARASET

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“…This high loss burdens the budgets of earthquakeprone countries (countries whose territories lie atop tectonic plate lines) [4][5][6][7], so several of them used traditional insurance mechanisms to obtain contingency funds for mitigation from 1992 to 2000. However, this mechanism generally has shortcomings, whereby the provided contingency costs pale in comparison to the actual losses incurred [8][9][10]. For example, earthquake insurance in Turkey in 1992 and Japan in 1993 provided contingency costs of USD 10.8 million (1.44% of actual losses) [11] and USD 16 million (1.6% of actual losses) [12], respectively.…”

Section: Introductionmentioning

confidence: 99%

Earthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength

Ibrahim,

Sukono,

Napitupulu

et al. 2024

Mathematics

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Traditional insurance’s earthquake contingency costs are insufficient for earthquake funding due to extreme differences from actual losses. The earthquake bond (EB) links insurance to capital market bonds, enabling higher and more sustainable earthquake funding, but challenges persist in pricing EBs. This paper presents zero-coupon and coupon-paying EB pricing models involving the inconstant event intensity and maximum strength of extreme earthquakes under the risk-neutral pricing measure. Focusing on extreme earthquakes simplifies the modeling and data processing time compared to considering infinite earthquake frequency occurring over a continuous time interval. The intensity is accommodated using the inhomogeneous Poisson process, while the maximum strength is modeled using extreme value theory (EVT). Furthermore, we conducted model experiments and variable sensitivity analyses on EB prices using earthquake data from Indonesia’s National Disaster Management Authority from 2008 to 2021. The sensitivity analysis results show that choosing inconstant intensity rather than a constant one implies significant EB price differences, and the maximum strength distribution based on EVT matches the data distribution. The presented model and its experiments can guide EB issuers in setting EB prices. Then, the variable sensitivities to EB prices can be used by investors to choose EB according to their risk tolerance.

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“…As a result, between 1992 and 2000, many countries used traditional insurance mechanisms to obtain contingency costs for their earthquake responses. However, traditional earthquake insurance mechanisms are generally ineffective because the contingency costs are less significant than the actual losses [8,9]. For example, in 1992, Turkey used earthquake insurance to cope with an earthquake in Erzincan with a magnitude of 6.8 Mw [10].…”

Section: Introductionmentioning

confidence: 99%

How to Price Catastrophe Bonds for Sustainable Earthquake Funding? A Systematic Review of the Pricing Framework

2023

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Earthquake contingency costs in traditional insurance cannot provide sufficient earthquake funding for a country because they often differ significantly from actual losses. Over the last three decades, this approach has been replaced by linking earthquake insurance to bonds in the capital market; this is now known as the earthquake catastrophe bond (ECB). Through the ECB, contingency costs become larger and more sustainable earthquake funds. Unfortunately, there are challenges in ECB issuance, as the pricing framework does not yet have standard rules and still needs to be studied. Therefore, the objective of this study is to systematically review how the ECB pricing framework is designed. The method used in this review is PRISMA. First, articles aiming to design an ECB pricing framework were collected from the Scopus, Science Direct, and Dimensions databases on 22 March 2023. Then, the results were selected, resulting in eleven relevant articles. Then, the articles’ pricing frameworks were reviewed based on variables, methods, trigger events, coupon and redemption value payment schemes, and the model solution forms. Finally, several research opportunities for academics are also outlined. This research constitutes a reference for ECB issuers during the pricing process and can motivate academics to design more useful ECB pricing models.

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Alternative to Insurance Risk Transfer: Creating a catastrophe bond for Romanian earthquakes

Cited by 6 publications

References 12 publications

Decomposition of Disaster Region using Earthquake Parameter and STDM Distance: Catastrophe Bond Pricing Single Period

Decomposition of Disaster Region using Earthquake Parameter and STDM Distance: Catastrophe Bond Pricing Single Period

Earthquake Bond Pricing Model Involving the Inconstant Event Intensity and Maximum Strength

How to Price Catastrophe Bonds for Sustainable Earthquake Funding? A Systematic Review of the Pricing Framework

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