The influence of non-linear dependencies on the basis risk of industry loss warranties

Risk management using index-linked catastrophic loss instruments

“…Results in Gatzert and Kellner (2010) illustrate that basis risk (using different definitions) and SCR decrease in a similar way for an increasing degree of dependence between the insurer's and the industry losses if an ILW is purchased for risk management. Furthermore, besides the degree of dependence, it is the type of dependence, which considerably affects SCR.…”

“…In this section, the same input parameters as in Gatzert and Kellner (2010) are used, and additional analyses are conducted with the aim to examine the impact of different degrees and types of dependence and different investment strategies in the presence of an ILW. Therefore, the fraction invested in low-risk investments (γ ) is varied for different degrees and types of dependence between the insurer's losses and the industry index.…”

“…In many studies, the hedging effectiveness of index-linked catastrophic loss instruments is an important subject, which is strongly influenced by the dependence structure between the insurer's losses and the index. In this paper, the impact of management strategies on the asset side and the use of an ILW contract on the insurer's risk situation are examined simultaneously for different dependence structures between relevant processes based on the paper by Gatzert and Kellner (2010) presented at the Annual Meeting of the DVfVW in March 2010.…”

“…For more details regarding the model and a formal description, seeGatzert and Kellner (2010).4 Burnecki et al (2000) empirically examined PCS loss indices mostly used as reference indices for catastrophic events, and detect that a lognormal distribution provides a good fit for these indices.…”

“…InGatzert and Kellner (2010), five different basis risk definitions are compared, which behave similarly for increasing degrees of dependence between the company's and the industry losses.…”