Securitization for common health

Francesco Ciardiello, Emilia Di Lorenzo, Massimiliano Menzietti and Marilena Sibillo

Socio-Economic Planning Sciences, 2024, vol. 93, issue C

Abstract: Securitization is the process of turning a financial asset, such as a loan or a mortgage, into a security that can be bought and sold on the market. Insurance-linked securities have been developed in order to foster the risk-transfer from insurers to capital market. In the context of pandemics or health crisis, securitization has been used to raise funds for crucial healthcare infrastructure and resources. However, securitization can also play a role in lowering infectious rates of pandemics as a part of risk mitigation strategies. Securitization can be engineered at higher standards and levels involving different actors. In the current paper, we propose an operational securitization mechanism based on the previous work by Di Lorenzo and Sibillo (2020) where a bond with coupon linked to the infection rate is introduced in order to reduce the risk exposure of an insurer offering health coverage. The combination of bond and health policies is structured in such a way to foster the economic operators (insureds, insurer, investors on capital market) to reduce the pandemic risk. It follows that companies might guarantee collective health for their workers if they subscribe insurance policies. Indeed, issuing such a bond on the market is challenging, due to poor market liquidity and, then, due to difficulties in pricing. In these regards, we value the pandemic-linked bond via an approach based on an inter-temporal CRRA utility function that, in its turn, determines a certain equivalent financial bond. The comparison values the pandemic-linked bond at varying with investors’ risk-aversion and sustainable-projects desirability. This provides an estimation of the risk-transfer cost for the insurers.

Keywords: Insurance risk; Financial engineering; Common health; Pandemic; Securitized bond; COVID-19 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:soceps:v:93:y:2024:i:c:s0038012124000788

DOI: 10.1016/j.seps.2024.101879

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