Reinsurance or CAT Bond? How to Optimally Combine Both

Denis-Alexandre Trottier and Van Son Lai

No 2017-003, Working Papers from Department of Research, Ipag Business School

Abstract: We study how traditional reinsurance and CAT bonds can be combined to build an optimal catastrophe insurance programme. We develop a contingent claims model to investigate the imperfections and imitations of the reinsurance market stemming from financial distress costs and default risk. We find that the pricing markup and credit risk will typically be larger for reinsurance contracts that cover the higher and less probable layers of losses. We show that the optimal hedging strategy is to cover small losses using reinsurance and hedge higher losses by issuing a CAT bond. Our results demonstrate that this strategy significantly lowers the insurer?s cost of protection, expands his underwriting capacity and yields higher shareholder values.

Keywords: Catastrophe bonds; Reinsurance; Risk management; Contingent claims analysis (search for similar items in EconPapers)
Pages: 45 pages
Date: 2017-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://faculty-research.ipag.edu/wp-content/uploa ... IPAG_WP_2017_003.pdf (application/pdf)

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:ipg:wpaper:2017-003

Access Statistics for this paper

More papers in Working Papers from Department of Research, Ipag Business School Contact information at EDIRC.
Bibliographic data for series maintained by Ingmar Schumacher ().