Predicting catastrophe risk: Evidence from catastrophe bond markets

Zhao, Yang; Yu, Min‐Teh

doi:10.1016/j.jbankfin.2020.105982

Cited by 14 publications

(3 citation statements)

References 34 publications

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“…By comparison, some research results support that CAT bond markets efficiently incorporate useful information related to future CAT risks (e.g. Zhao and Yu, 2020;Chang et al, 2019;Herrmann and Hibbeln, 2021). For example, Zhao and Yu (2020) find from the CAT bond market's price discovery efficacy that future CAT losses are able to explain high-yield CAT bond spreads.…”

Section: Introductionmentioning

confidence: 94%

“…Zhao and Yu, 2020;Chang et al, 2019;Herrmann and Hibbeln, 2021). For example, Zhao and Yu (2020) find from the CAT bond market's price discovery efficacy that future CAT losses are able to explain high-yield CAT bond spreads. Market-based forecasts derived from CAT bond prices have significant predictive content for future CAT losses at both 12-and 24-month forecast horizons.…”

Section: Introductionmentioning

confidence: 99%

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Catastrophe risk, reinsurance and securitized risk-transfer solutions: a review

Zhao

Lee

2021

CFRI

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PurposeCatastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.Design/methodology/approachThis research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.FindingsThe authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.Originality/valueThis research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.

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Section: Introductionmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 99%

Catastrophe risk, reinsurance and securitized risk-transfer solutions: a review

Zhao

Lee

2021

CFRI

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“…Across several asset markets, implied parameter estimates haven proven richer in information than their historical counterparts, because they incorporate premia for liquidity risk as well as price risk, and account for the supply-and-demand situation prevailing in the market. 1 Most recently, Chang et al (2019) and Zhao and Yu (2020) showed that the primary market for cat bonds incorporates information about disaster arrival frequency and expected future NatCat losses into risk spreads. They propose to use forward-looking forecasts of catastrophe arrival frequencies based on market consensus as an alternative to historical estimation approaches.…”

Section: Introductionmentioning

confidence: 99%

Market-Consistent Valuation of Natural Catastrophe Risk

Beer¹,

Braun

2019

SSRN Journal

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Natural catastrophe risk is increasingly covered through alternative capital instead of classical reinsurance. As most instruments in this space do not trade in a secondary market, their ongoing valuation poses a challenge to investors. We suggest extracting pricing information contained in regularly observed catastrophe bond quotes by means of a reduced form model. The resulting implied Poisson intensities are shown to materially depend on the time to maturity and modeled probability of first loss. Along these two dimensions, we estimate smooth hazard rate surfaces that allow investors to mark illiquid catastrophe risk contracts to market.

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