Study On Pricing Of Typhoon Catastrophe Risk Bonds

In recent years, the frequent occurrence of worldwide catastrophe causes huge casualties and property losses. The number of the catastrophe occurs yearly and the extent of damage it caused is slightly increased. The increasing amount of the catastrophe losses will lead the insurance industry to face severe challenges especially in the21st century. Insurance companies may face liquidation or bankruptcy because of bearing an unexpected catastrophe, but also result in insured losses. Therefore, the insurers who want to solve their dilemma of underwriting capacity lankness eager the emergence of a new financial tool to transfer underwriting risk. Then catastrophe risk bonds are produced through professional researches.Catastrophe risk bond is one of the major catastrophe risk securitization products. The main objective of product design is to transfer the catastrophe bonds risk, through the issuance of bonds related to the catastrophe losses, make the capital and the insurance market to better mutual circulation, so that the capital markets and insurance markets can be closely linked. Future catastrophe bonds issued in the mainland of China promotes vigorous development of the insurance industry and provides new blood to the insurance industry.Catastrophe risk bonds issued abroad has matured, this article attempts to explore the pricing principles of typhoon catastrophe risk bonds in China under the issuance of catastrophe risk bonds abroad.The first part of this article describes the forming background of catastrophe bonds, status and the classification of catastrophe bonds issued abroad, sums up this issue trend of foreign bonds and problems encountered in bonds issued abroad. It also prospects the future development path of China’s catastrophe bonds.The second part describes the basic knowledge of catastrophe bonds, it also introduces the model and principles of catastrophe bonds pricing.The third part is mainly about the empirical analysis. It selects Typhoon sample data from the year of1989to2012in mainland China, the amount of direct loss of the sample is more than a billion, and according to the statistical characteristics of the sample data. Firstly, this article uses the Poisson distribution and a variety of distribution models to fit Typhoon sample data, then it detects the results by using goodness test and K-S test. And it draws fitting renderings with MATLAB. It also selects the best fitting model by comparing graphics and visual results of the model, and then selects the best fitting model.Next, the article uses g-h distribution to fitting sample data and does hypothesis test through the introduction of the distribution. Finally, this article uses the Poisson distribution fitting typhoon losses, and uses the translation of gamma distribution to fitting compound Poisson distribution.The fourth part is about the pricing study of typhoon catastrophe bonds. Basing on the selections of the best fitting model and the number of typhoons happened per year preamble, this article uses LFC model to fit typhoon samples data, and it draws the spread sheet of three-year period catastrophe bonds. Then this article calculates the price of triennium typhoon catastrophe bonds by using the binomial model rates and the discounted cash flow model. Finally, this article uses Wang Two-factor model to pricing our one-year typhoon catastrophe bonds. Parameters of the model are calculated by the U.S. catastrophe bonds’ fitting results of Wang’s. This article gets the yearly typhoon catastrophe securities prices in different proportions through calculation, the parameters which exist in the Wang Two-factor model are derived from the fitting of U.S. catastrophe bonds by Wang.The fifth part makes a concluding of the article, the article gives the relevant policy recommendations about the pilot issue of catastrophe bonds in China.The innovation of this article is to select the most appropriate distribution fit, to fit pricing of China’s typhoon catastrophe bonds by learning from foreign models and to give the price of the typhoon catastrophe risk bonds under different trigger points, in order to providing guidance and advising for future issuance of catastrophe risk bonds.