5design And Pricing Of Earthquake Catastrophe Bonds-based On Bayesian Segmentation Model

Earthquakes occur when continental plates move against each other at their boundaries.China is located at the combination of the Pacific Rim seismic zone and the Eurasian seismic zone,and is under the strong compression of the Pacific plate,the Indian plate and the Philippine plate,which leads to unusually active movements of earthquake faults.Seismic activity is very frequent in China,often of large magnitude,and with relatively shallow source depths and a wide range of seismic zones,making China a country seriously affected by seismic hazards.Although the land area of our country only accounts for about 6% of the global land area,the number of land earthquakes in our country accounts for about 33% of the total number of land earthquakes in the world,the number of deaths caused by earthquakes even exceeds half of the corresponding global total.To cope with earthquake catastrophe risks,China started to carry out pilot earthquake catastrophe insurance in a number of places one after another in 2014,including Dali in Yunnan province,Shenzhen and Ningbo.The development of earthquake catastrophe insurance has to a certain extent eased the financial pressure on the government to cope with earthquake risks,but the earthquake catastrophe insurance payout is still very limited compared to the actual losses.For this reason,in 2016,the former CIRC and the Ministry of Finance jointly issued the Implementation Plan for Establishing an Earthquake Catastrophe Insurance System for Urban and Rural Residents(hereinafter referred to as the Implementation Plan),which pointed out that earthquake insurance in China should take into account realistic needs and long-term planning,take earthquake catastrophe insurance as a breakthrough,launch earthquake catastrophe insurance products for urban and rural residences,and establish the China Urban and Rural Residential Earthquake Catastrophe Insurance Community.At the same time,the Implementation Plan proposes to share the losses according to the principle of "risk sharing and graded burden",i.e.,the insured,insurance companies,reinsurance companies,earthquake catastrophe insurance special reserve,financial support or catastrophe bonds and other emergency funds constitute the main body of sharing.When an earthquake disaster occurs,losses are borne by the policyholder,direct insurance company,reinsurance company and special reserve for earthquake catastrophe insurance according to four levels,from small to large.When the earthquake disaster is more serious and the loss exceeds the fourth tier,the loss in the fifth tier will be compensated by financial funds or emergency funds including catastrophe bond funds.At present,earthquake catastrophe insurance in China has been piloted in several provinces and cities,while reinsurance has been arranged and special reserves for catastrophes have been set up.However,as pointed out in the Implementation Plan,the risk-bearing capacity of each risk-sharing entity mentioned above is limited.In order to cope with the losses caused by major earthquake disasters and at the same time reduce the pressure of government financial payments,it is necessary to explore earthquake catastrophe bonds to transfer earthquake catastrophe risks into the capital market.Catastrophe bonds are bonds that tie investment returns to pre-specified catastrophe losses.They can help catastrophe bond sponsors such as insurance companies to be able to transfer part of their catastrophe risks to the capital market.With catastrophe bonds,insurers can better cope with catastrophe risk and effectively improve their own underwriting capacity,while catastrophe bonds also provide a high-quality investment option for institutional investors.China has now issued earthquake catastrophe bonds based on the seismic risk of the China earthquake in overseas and Chinese Hong Kong,but the uncertainty and complexity of earthquake disasters and the lack of mature technology in insurance actuarial in our country have led to the lack of perfection in risk assessment of earthquake catastrophe bonds in China.To this end,this paper will explore the issuance mechanism of earthquake catastrophe bonds based on the characteristics of earthquake catastrophe risk,and also estimate the earthquake catastrophe losses using Bayesian segmentation model,and price earthquake catastrophe bonds on this basis.The main research contents include: first,discussing the necessity of issuing earthquake catastrophe bonds,and also analyzing the current situation of earthquake catastrophe bonds issued in China;second,the design of earthquake catastrophe bonds is based on the basic elements of catastrophe bonds,combined with the compensation limits of current earthquake disaster insurance products;third,a Bayesian segmentation model is used to fit the direct economic losses of earthquake disasters.The model divides the earthquake catastrophe loss distribution into two segments based on extreme value theory,i.e.,the part below the threshold value is fitted with the commonly used loss distribution,and the part above the threshold value is assumed to obey the generalized Pareto(GPD)distribution,while Gibbs sampling in MCMC sampling is used to obtain estimates of the threshold value and related parameters;finally,an appropriate rate calculation model is selected for the rate calculation submitted by the bond sponsor to the special purpose vehicle,and the segmentation model estimates obtained earlier are applied to price the designed earthquake catastrophe bond.The structure of this paper is as follows: Chapter 1 is the introduction,which introduces the background and significance of the study,research review,research methods and innovations;Chapter 2 is the analysis of the necessity of earthquake catastrophe bonds;Chapter 3 is the design of the basic elements of earthquake catastrophe bonds,including risk duration,trigger mechanism,form of principal guarantee and issue size;Chapter 4 is the fitting of earthquake disaster losses,introducing the segmentation model and its Bayesian estimation method through the introduction of extreme value theory,and conducting a corresponding empirical study;Chapter 5 is the determination of earthquake catastrophe bond rates;Chapter 6 is the conclusion and policy recommendations.