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223034 (M54) The securitisation of catastrophic property risks
Abstracts and Reviews Keywords: Prediction, Losses, Ratemaking, reserves, General linear model.
11154: CATASTROPHIC RISKS 223034 (M54) The Securitisation of Catastrophic Property Risks. Tilley J., Astin/Aflr Colloquia, Cairns Australia, 1997, pp 27-56. Several reasons are suggested for the current slow emergence of a market for the securitisation and derivatisation of insurance risk. The principal focus of the paper is the financial engineering of securities and derivatives instruments that convey insurance risk directly to investors in the capital markets. It is shown how a special purpose reinsurer forms a bridge between conventional reinsurance and catastrophe-linked bonds. An equation is developed for the price of a pure catastrophe bond, which puts both principal and interest at risk, in terms of the probability of occurrence of the insured catastrophic event. It is then shown how to utilize a special purpose reinsurer to manufacture a principalprotected catastrophe bond as a more investor-friendly form of security that is ideal for launching the new insurance risk securitisation market. Next, it is demonstrated that over-the-couuter catastrophe call spread contracts are economically equivalent to excess of loss reinsurance contracts, and it is argued that such call spreads are likely to be the most efficient vehicle for transferring to investors exposure to low-probability mega-catastrophes. A stochastic simulation quantifies the value added to a portfolio of stocks and bonds from overlaying a modestly diversified portfolio of catastrophe call spreads. Finally, a cursory, qualitative treatment of various tax, accounting, and regulatory matters is presented, as well as a suggestion as to how the US federal government should become involved in the longterm financing of property catastrophe risks Keywords: Call spreads, Catastrophic risks, Excess-ofloss reinsurance, insurance derivatives, Insurance risk securitization.
223035 (M54) The Competitive Market Equilibrium Risk Load Formula for Catastrophe Ratemaking. Meyers G.G., Casualty Actuarial Society, Proceedings, Volume LXXXIII, Part 2, Nr. 159, 1996, pp 563-600. The catastrophic losses caused by Hurricane Andrew and the Northridge Earthquake are leading many
299
actuaries to reconsider their pricing formulas for insurance with a catastrophe exposure. Many of these formulas incorporate the results of computer simulation models for catastrophes. In a related development, many insurers are using a geographic information system to monitor their concentration of business in areas prone to catastrophic losses. While insurers would like to diversify their exposure, the insurance-buying public is not geographically diversified. As a result, insurers must take on greater risk if they are to meet the demand for insurance. This paper develops a risk load formula that uses a computer simulation model for catastrophes and considers geographic concentration as the main source of risk. Keywords: Catastrophic losses, Pricing, Computer simulation, Risk load.
E: INSURANCE ECONOMICS
El0: INSURANCE RELATED MATHEMATICAL ECONOMICS,GENERAL AND MISCELLANEOUS 223036 (El0, B23) Adverse Selection, Bequests, Crowding out, and Private Demand for Insurance: Evidence from the Long-term Care Insurance Market. Sloan F.A., Norton E.C., Journal of Risk and Uncertainty, Volume 15, Nr. 3, 1997, pp 201-220. Adverse selection, moral hazard and crowding out by public insurance have all been proposed as theoretical reasons for why the market for private long-term care insurance has been slow to evolve in the U.S. Using national samples of the elderly and near elderly, this study investigates which is most important. The data contain direct measures of risk aversion, expectations of future nursing home use and living to old age, and the bequest motive. For both groups, the authors find evidence of adverse selection, and for the elderly, crowding out of private long-term care insurance by Medicaid. However, they do not find that demand for such insurance is motivated either by bequest or exchange motives. Keywords: Long-term care, Insurance, Bequests. 223037 (El0) Complete Versus Incomplete Insurance Contracts under Adverse Selection with Multiple Risks. Fluet C., Pannequin F., The Geneva Papers on Risk and Insurance Theory, 22, 1997, pp 81-102.
11154: CATASTROPHIC RISKS 223034 (M54) The Securitisation of Catastrophic Property Risks. Tilley J., Astin/Aflr Colloquia, Cairns Australia, 1997, pp 27-56. Several reasons are suggested for the current slow emergence of a market for the securitisation and derivatisation of insurance risk. The principal focus of the paper is the financial engineering of securities and derivatives instruments that convey insurance risk directly to investors in the capital markets. It is shown how a special purpose reinsurer forms a bridge between conventional reinsurance and catastrophe-linked bonds. An equation is developed for the price of a pure catastrophe bond, which puts both principal and interest at risk, in terms of the probability of occurrence of the insured catastrophic event. It is then shown how to utilize a special purpose reinsurer to manufacture a principalprotected catastrophe bond as a more investor-friendly form of security that is ideal for launching the new insurance risk securitisation market. Next, it is demonstrated that over-the-couuter catastrophe call spread contracts are economically equivalent to excess of loss reinsurance contracts, and it is argued that such call spreads are likely to be the most efficient vehicle for transferring to investors exposure to low-probability mega-catastrophes. A stochastic simulation quantifies the value added to a portfolio of stocks and bonds from overlaying a modestly diversified portfolio of catastrophe call spreads. Finally, a cursory, qualitative treatment of various tax, accounting, and regulatory matters is presented, as well as a suggestion as to how the US federal government should become involved in the longterm financing of property catastrophe risks Keywords: Call spreads, Catastrophic risks, Excess-ofloss reinsurance, insurance derivatives, Insurance risk securitization.
223035 (M54) The Competitive Market Equilibrium Risk Load Formula for Catastrophe Ratemaking. Meyers G.G., Casualty Actuarial Society, Proceedings, Volume LXXXIII, Part 2, Nr. 159, 1996, pp 563-600. The catastrophic losses caused by Hurricane Andrew and the Northridge Earthquake are leading many
299
actuaries to reconsider their pricing formulas for insurance with a catastrophe exposure. Many of these formulas incorporate the results of computer simulation models for catastrophes. In a related development, many insurers are using a geographic information system to monitor their concentration of business in areas prone to catastrophic losses. While insurers would like to diversify their exposure, the insurance-buying public is not geographically diversified. As a result, insurers must take on greater risk if they are to meet the demand for insurance. This paper develops a risk load formula that uses a computer simulation model for catastrophes and considers geographic concentration as the main source of risk. Keywords: Catastrophic losses, Pricing, Computer simulation, Risk load.
E: INSURANCE ECONOMICS
El0: INSURANCE RELATED MATHEMATICAL ECONOMICS,GENERAL AND MISCELLANEOUS 223036 (El0, B23) Adverse Selection, Bequests, Crowding out, and Private Demand for Insurance: Evidence from the Long-term Care Insurance Market. Sloan F.A., Norton E.C., Journal of Risk and Uncertainty, Volume 15, Nr. 3, 1997, pp 201-220. Adverse selection, moral hazard and crowding out by public insurance have all been proposed as theoretical reasons for why the market for private long-term care insurance has been slow to evolve in the U.S. Using national samples of the elderly and near elderly, this study investigates which is most important. The data contain direct measures of risk aversion, expectations of future nursing home use and living to old age, and the bequest motive. For both groups, the authors find evidence of adverse selection, and for the elderly, crowding out of private long-term care insurance by Medicaid. However, they do not find that demand for such insurance is motivated either by bequest or exchange motives. Keywords: Long-term care, Insurance, Bequests. 223037 (El0) Complete Versus Incomplete Insurance Contracts under Adverse Selection with Multiple Risks. Fluet C., Pannequin F., The Geneva Papers on Risk and Insurance Theory, 22, 1997, pp 81-102.