Typology and Design of Parametric Cat-in-a-Box and Cat-in-a-Grid Triggers for Tropical Cyclone Risk Transfer

Guillermo Franco (), Laura Lemke-Verderame, Roberto Guidotti, Ye Yuan, Gianbattista Bussi, Dag Lohmann and Paolo Bazzurro
Additional contact information
Guillermo Franco: Guy Carpenter & Company LLC, 1166 Avenue of the Americas, New York, NY 10036, USA
Laura Lemke-Verderame: Guy Carpenter & Company LLC, 1166 Avenue of the Americas, New York, NY 10036, USA
Roberto Guidotti: Guy Carpenter & Company LLC, 1166 Avenue of the Americas, New York, NY 10036, USA
Ye Yuan: Guy Carpenter & Company LLC, 1166 Avenue of the Americas, New York, NY 10036, USA
Gianbattista Bussi: RED Risk Engineering + Development, Via Giuseppe Frank 38, 27100 Pavia, Italy
Dag Lohmann: KatRisk LLC, 2397 Shattuck Avenue, Suite 212, Berkeley, CA 94704, USA
Paolo Bazzurro: RED Risk Engineering + Development, Via Giuseppe Frank 38, 27100 Pavia, Italy

Mathematics, 2024, vol. 12, issue 11, 1-25

Abstract: The insurance industry has used parametric solutions to transfer catastrophe risks since the 1990s. Instead of relying on a lengthy process to assess a claim, these products pay the insured a pre-agreed amount if the physical characteristics of the event fulfill pre-defined conditions. Cat-in-a-box or cat-in-a-circle triggers, commonly used tools for tropical cyclone risk transfer, provide a payout to the insured if the track of a hurricane crosses the perimeter of a geographic area defined by a polygon or a circle with a certain intensity. Cat-in-a-grid solutions are novel and more sophisticated. They rely on a set of multiple cat-in-a-box triggers arranged on an orthogonal grid. The consideration of multiple geographic domains instead of a single box or circle is helpful to reduce basis risk, i.e., the difference between the parametric loss estimate and the target loss. In the case study for Miami presented here, for instance, a cat-in-a-grid solution showed 18.5% less basis risk than a typical cat-in-a-box alternative. To organize the different types of triggers within a common framework, we classify the existing alternatives based on whether they use a single geographic domain (like a box or a circle) or multiple domains (like a grid). We discuss their advantages and disadvantages and describe the process required to calibrate any one solution with the help of a catastrophe-risk model. We focus, in particular, on the analysis and construction of cat-in-a-grid triggers, the alternative that we believe offers the greatest potential for global standardization and adoption.

Keywords: parametric; insurance; hurricane; cyclone (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7390/12/11/1768/pdf (application/pdf)
https://www.mdpi.com/2227-7390/12/11/1768/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jmathe:v:12:y:2024:i:11:p:1768-:d:1410119

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().