Providing Pandemic Business Interruption Coverage with Double Trigger Cat Bonds

André Schmitt and Sandrine Spaeter

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: The aim of this paper is to show whether the insurance and reinsurance sectors supplemented by qualified investors in cat bonds can offer business interruption protection due to a pandemic such as COVID-19 at affordable rates. First, we propose a comprehensive numerical model to show how cat bonds can contribute to complement standard (re)insurance even though risks are positively correlated between different firms or sectors. We present the conditions under which fairer coverage can be provided to insured firms. Second, we discuss the characteristics of the triggers that are needed to provide efficient pandemic business interruption cat bonds (PBI cat bonds), which do not exist yet on the market of insurancelinked securities (ILS). The double trigger pandemic bonds we build are structured on a first trigger which is pulled when the World Health Organization (WHO) declares a Public Health Emergency of International Concern (PHEIC). The second trigger determines the payout of the bond based on the modelized business interruption losses of an industry in a country. In this framework, we discuss moral hazard, basis risk, correlation and liquidity issues. Third, to answer the feasibility of our (two-layer) coverage scheme we simulate the life of theoretical PBI bonds at the height of the pandemic. We apply them to the restaurant industry in France and we use data gathered during the COVID-19 pandemic.

Keywords: pandemic cat bond; business interruption losses; securitization; (re)insurance. (search for similar items in EconPapers)
JEL-codes: G11 G22 Q54 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-hea, nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2022-05

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