Research On Application Of Contingent Convertible Bonds In Catastrophe Risk Transfer Of Property Insurance Companies

In recent years,catastrophic events have occurred frequently in the world,and the economic losses caused by them have also increased year by year.Catastrophic risk has become a major problem plaguing the whole world.In order to transfer catastrophe risk to other markets,a variety of Alternative Risk Transfer(ART)tools came into being.Contingent capital will be one of the innovative directions of catastrophe risk transfer tools in the future.At the same time,contingent convertible bonds(CoCos)have been applied in the financial industry.As a bond that combines creditor's rights and equity,when the enterprise has financial crisis,CoCos can convert debt into equity,which has achieved remarkable results in reducing the risk of enterprise bankruptcy.Therefore,the design of CoCos as a catastrophe risk transfer tool has a certain practical basis and practical significance.This paper studies how to apply CoCos to the catastrophe risk transfer mechanism of property insurance companies,and analyzes the effect of risk transfer from both quantitative and qualitative aspects.Under the framework of this article,property insurance companies will issue CoCos through special purpose(SPV)institutions.Before the bond conversion,property insurance companies pay reinsurance premium to SPV,while SPV pays coupons to bondholders.After the conversion,the property insurance company will distribute part of its equity to the bondholder according to the prior agreement,while SPV will make catastrophe compensation to the property insurance company.In order to obtain the effect of CoCos on the catastrophe risk transfer of property insurance companies,this paper constructs a value model of property insurance companies with CoCos.After solving the differential equations,this paper derives an explicit expression of CoCos,equity,ordinary bonds,and company value.Combined with the solvency adequacy requirement,the conversion boundary of CoCos is derived.After that,the cash flow statements and balance sheets of 13 property insurance companies are used to determine the relevant values,and the numerical simulation and sensitivity analysis of the bankruptcy severity and company value of property insurance companies are carried out.The numerical results show that the CoCos can effectively reduce the cost of bankruptcy loss caused by catastrophe risk and the probability of bankruptcy,and improve the stability of the company's value,thereby improving the underwriting capacity of the property insurance company for catastrophe risk.Finally,this paper suggests that property insurance companies should start to improve pricing technology,reduce operating costs and improve the monitoring efficiency of conversion indicator data.The government can become the main purchaser of CoCos at the initial stage of the issue,and subsidize the CoCos holders and property insurance companies.Also,improving the supervision of property insurance companies is needed.