Research On Insurance Boundary Based On Catastrophe Swaps

In recent years,catastrophic events have occurred frequently worldwide,and China experiences several large natural disasters every year.At present,the average underwriting level of natural disasters in Western developed countries is generally above 36%,while it is less than 10% in our country and most of the losses are borne by the government.How to develop China’s insurance market,expand underwriting coverage and enhance China’s overall insurance underwriting level have become one of China’s primary tasks.A critical step of this process is introducing catastrophe derivatives.As a new type of catastrophe derivatives,catastrophe swap has more simple transaction process,lower cost and greater flexibility,and can spread risks more effectively than those traditional catastrophe derivatives like CAT bond.Right now,the world’s largest 82 reinsurance companies and more than 1,000 insurance companies are using catastrophe swaps as one of their main instruments of spreading risks.China has not yet carried out such products for the time being,but based on internationally successful experience,catastrophe swaps can effectively enhance the insurance market ’s underwriting level and ease the government ’s status as the final guarantor of catastrophe risks.Thus,there is a great potential market in China for catastrophe swap.Due to the opacity of the transaction data,there are few researches on catastrophe swaps abroad,and even lesser domestically.The development of the catastrophe swap market in China requires great theoretical support,and this article aims to enrich the domestic research on the pricing theory and practical role of catastrophe swap.This article summarizes the current research on catastrophe swap at home and abroad,and constructs a catastrophe swap pricing model with discontinuous interest spreads based on the pricing methods of catastrophe bonds and other catastrophe derivatives.In order to further discuss the insurable boundary based on the catastrophe swap,another pricing model is constructed under the assumption that the spread is continuously paid.On this basis,we managed to calculate the insurance company’s surplus status under the condition of signing a catastrophe swap.Using the Gerber-Shiu discounted penalty function and its related theorems,the ruin probability and insurable boundary of the insurance company with and without the catastrophe swap are derived.As for empirical analysis,we use typhoon loss data in Guangdong Province from 2014 to 2016 to fit the catastrophe loss,the fair spread of the catastrophe swap was solved under given assumptions,and the impact of the catastrophe swap on the insurable boundary was discussed.Finally,a feasible method for searching the optimal catastrophe swap configuration is given.Experiments have proved that catastrophe swap can improve the underwriting capacity of insurance companies to a certain extent.The introduction of catastrophe swaps can be a promising method in improving the current situation of China’s low catastrophe underwriting level.