Modeling Loss Index Triggers for Catastrophe (Cat) Bonds: An Alternative Continuous Approach

  • María José Pérez-Fructuoso Universidad a Distancia de Madrid (UDIMA)

Abstract

This paper proposes a method for continuous-time random modeling of loss indextriggeredcatastrophe bonds (cat bonds) that simplifies both rating and pricing throughouttheir maturity period. This index is based on the amount of declared losses calculated as thedifference between the total amount of the catastrophe and that of incurred-but-not-yetreportedlosses, which is modeled by means of a geometric Wiener process. Thefundamental assumption of this model lies in considering that this amount decreasesproportionally to a function, hereby called the mixed-rate of claims statement, whichrepresents the pace of claim statements as growing linearly up to a certain moment, afterwhich it becomes constant until the bond reaches maturity.

Author Biography

María José Pérez-Fructuoso, Universidad a Distancia de Madrid (UDIMA)
María José Pérez-Fructuoso es profesora de Matemáticas, Estadística y Econometría en la Universidad a Distancia de Madrid (UDIMA). Con más de 20 años de experiencia como profesora de matemáticas (en sus distintas versiones: álgebra, cálculo, optimización, matemática financiera, matemáticas actuarial,…) en distintas universidades españolas (Universidad de Barcelona, Universidad de Extremadura y Universidad Carlos III de Madrid).
Published
2017-10-25
How to Cite
Pérez-Fructuoso, M. (2017). Modeling Loss Index Triggers for Catastrophe (Cat) Bonds: An Alternative Continuous Approach. Harvard Deusto Business Research, 6(2), 84-101. doi:10.3926/hdbr.64
Section
Articles

Keywords

catastrophe bonds (cat bonds); reported loss amount; incurred-but-not-yet-reported loss amount; mixed claim reporting rate; geometric Brownian motion; catastrophic loss ratio.