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Hybrid Cat-bonds

Pauline Barrieu and Henri Loubergé
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Pauline Barrieu: London School of Economics

No 07-27, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Natural catastrophes attract regularly the attention of media and have become a source of public concern. From a financial viewpoint, natural catastrophes represent idiosyncratic risks, diversifiable at the world level. But for reasons analyzed in this paper reinsurance markets are unable to cope with this risk completely. Insurance-linked securities, such as cat bonds, have been issued to complete the international risk transfer process, but their development is disappointing so far. This paper argues that downside risk aversion and ambiguity aversion explain the limited success of cat bonds. Hybrid cat bonds, combining the transfer of cat risk with protection against a stock market crash, are proposed to complete the market. Using the concept of market modified risk measure, the paper shows that replacing simple cat bonds with hybrid cat bonds would lead to an increase in market volume.

Keywords: Risk management; Risk transfer; Catastrophes; Risk measures; Reinsurance; Optimal design (search for similar items in EconPapers)
JEL-codes: D81 G22 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-09
New Economics Papers: this item is included in nep-fmk, nep-ias and nep-rmg
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Citations: View citations in EconPapers (1)

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http://ssrn.com/abstract=1016028 (application/pdf)

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Journal Article: Hybrid Cat Bonds (2009) Downloads
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