Naslov (eng)

Do cat bond yields predict future catastrophic events?

Autor

Božović, Miloš

Publisher

Opis (eng)

Rare events can generate substantial losses for insurance companies, particularly when such events are systemic. Natural disasters represent economy-wide phenomena that typically result in significant insurance outflows and, consequently, elevate the liabilities of reinsurance companies tasked with hedging rare-event risks for primary insurers. The construction of tradable portfolios replicating the behavior of factors underlying rare events, such as natural catastrophes, is fundamental to effectively hedging catastrophic risks and securitizing associated losses. These portfolios provide a basis for synthesizing various securities featuring catastrophe-linked payoffs (e.g., D’Arcy & France, 1992; Cummins et al., 2002; Harrington & Niehaus, 2003; Nowak et al., 2012). Among these instruments, the catastrophe (“CAT”) bond is the most prominent, functioning as a derivative wherein the underlying “asset” comprises a composite of variables that reflect property losses indemnified by insurance companies. A CAT bond is structured similarly to a corporate bond, wherein investors provide principal in exchange for periodic coupon payments and the return of principal at maturity, contingent upon the non-occurrence of a predefined catastrophic event. A CAT bond functions as a risk transfer instrument, offering protection against indemnity payments associated with a specified peril, as defined by a contractual “trigger.” The trigger is explicitly stipulated within the bond covenants and may be based on the exceedance of a predetermined loss threshold, an index value, or specific geophysical or meteorological parameters. CAT bonds typically have maturities ranging from one to five years. A default event is declared if the triggering conditions are satisfied during the bond term. The default event permits the issuer to access the collateralized principal to finance losses arising from the covered event.

Opis (eng)

This research was financially supported by the Ministry of Education, Science and Technological Development of the Republic of Serbia. The usual disclaimer applies.

Jezik

engleski

Datum

2025

Licenca

Ovo delo je licencirano pod uslovima licence
Creative Commons CC BY-NC-ND 4.0 - Creative Commons Autorstvo - Nekomercijalno - Bez prerada 4.0 International License.

http://creativecommons.org/licenses/by-nc-nd/4.0/legalcode

Predmet

Keywords: catastrophe, catastrophic events, risk transfer

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Ekonomski fakultet