Catastrophe index-linked securities and reinsurance as substituties

The use of catastrophe bonds (cat bonds) implies the problem of the so called basis risk, resulting from the fact that, in contrast to traditional reinsurance, this kind of coverage cannot be a perfect hedge for the primary’s insured portfolio. On the other hand cat bonds offer some very attractive economic features: Besides their usefulness as a solution to the problems of moral hazard and default risk, an important advantage of cat bonds can be seen in the presumably lower transaction costs compared to (re)insurance products. Insurance coverage usually incurs costs of acquisition, monitoring and loss adjustment, all of which can be reduced by making use of the financial markets. Additionally, cat bonds are only weakly correlated with market risk, implying that in perfect financial markets these securities could be traded at a price including just small risk premiums. Although these aspects have been identified in economic literature, to our knowledge there has been no publication so far that formally addresses the trade-off between basis risk and transaction cost. In this paper, therefore, we introduce a simple model that enables us to analyze cat bonds and reinsurance as substitutional risk management tools in a standard insurance demand theory environment. We concentrate on the problem of basis risk versus transaction cost, and show that the availability of cat bonds affects the structure of optimal reinsurance contract design in an interesting way, as it leads to an increase of indemnity for small losses and a decrease of indemnity for large losses

Catastrophic events as threats to society: Private and public risk management strategies

Dramatic events in the recent past have drawn attention to catastrophe risk management problems. The devastating terrorist attacks of September 11th, 2001 incurred the highest insured losses to date. Furthermore, a trend of increasing losses from natural catastrophes appears to be observable since the late 1980s. The increase in catastrophe losses triggered intensive discussion about risk management of catastrophic risk, focusing on three issues. First, considering the loss potential of certain catastrophic events, the insurance markets' capacity does not seem to be sufficient. An approach to address this capacity issue can be seen in passing certain catastrophic risks to investors via securitization. Second, after the events of September 11, 2001, the government's role as a bearer of risk became an increasingly important issue. Finally, as has been recently demonstrated by the floods in Europe of August 2002, problems of protecting against catastrophic threats do not only exist on the supply side but also on the demand side. Thus policymakers are considering the establishment of mandatory insurance for fundamental risks such as flood and windstorm. This paper will address aspects of these three issues. In particular, we are concerned with the extent to which state or government involvement in the management of catastrophic risk is reasonable. --catastrophic risk,risk management,public-private partnership

Improving risk allocation through cat bonds

Catastrophe bonds (cat bonds) often use index triggers, such as, for instance, parametric descriptions of a catastrophe. This implies the problem of the so-called basis risk, resulting from the fact that, in contrast to traditional reinsurance, this kind of coverage cannot be a perfect hedge for the primary's insured portfolio. On the other hand, cat bonds offer some very attractive economic features: Besides their usefulness as a solution to the problems of moral hazard and default risk, an important advantage of cat bonds can be seen in presumably lower risk premiums compared to (re)insurance products. Cat bonds are only weakly correlated with market risk, implying that in perfect financial markets these securities could be traded at a price including just small risk premiums. Furthermore, there is empirical evidence that risk aversion of reinsurers is an important reason for high reinsurance prices. In this paper we introduce a simple model that enables us to analyze cat bonds and reinsurance as substitutional risk management tools in a standard insurance demand theory environment. We concentrate on the problem of basis risk versus reinsurers' risk aversion and show that the availability of cat bonds affects the structure of an optimal reinsurance contract as well as the reinsurance budget. Primarily, reinsurance is substituted by index-linked coverage for large losses. --Insurance,Financial Markets,Decision Making and Risk

Sturm Bounds for Siegel Modular Forms

We establish Sturm bounds for degree g Siegel modular forms modulo a prime p, which are vital for explicit computations. Our inductive proof exploits Fourier-Jacobi expansions of Siegel modular forms and properties of specializations of Jacobi forms to torsion points. In particular, our approach is completely different from the proofs of the previously known cases g=1,2, which do not extend to the case of general g

When prices hardly matter: Incomplete insurance contracts and markets for repair goods

This paper looks at markets characterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequen¬ces of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insured’s actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers, if repair markets are imperfect

Multiple origins for the DLA at zabs=0.313z_\mathrm{abs}=0.313 toward PKS 1127−-145 indicated by a complex dust depletion pattern of Ca, Ti, and Mn

We investigate the dust depletion properties of optically thick gas in and around galaxies and its origin we study in detail the dust depletion patterns of Ti, Mn, and Ca in the multi-component damped Lyman-$\alpha$ (DLA) absorber at $z_\mathrm{abs}=0.313$ toward the quasar PKS 1127$-$145.} We performed a detailed spectral analysis of the absorption profiles of CaII, MnII, TiII, and NaI associated with the DLA toward PKS 1127$-$145, based on optical high-resolution data obtained with the UVES instrument at the Very Large Telescope (VLT). We obtained column densities and Doppler-parameters for the ions listed above and determine their gas-phase abundances, from which we conclude on their dust depletion properties. We compared the Ca and Ti depletion properties of this DLA with that of other DLAs. One of the six analyzed absorption components shows a striking underabundance of Ti and Mn in the gas-phase, indicating the effect of dust depletion for these elements and a locally enhanced dust-to-gas ratio. In this DLA and in other similar absorbers, the MnII abundance follows that of TiII very closely, implying that both ions are equally sensitive to the dust depletion effects. Our analysis indicates that the DLA toward PKS 1127$-$145 has multiple origins. With its narrow line width and its strong dust depletion, component 3 points toward the presence of a neutral gas disk from a faint LSB galaxy in front of PKS 1127$-$145, while the other, more diffuse and dust-poor, absorption components possibly are related to tidal gas features from the interaction between the various, optically confirmed galaxy-group members. In general, the Mn/CaII ratio in sub-DLAs and DLAs possibly serves as an important indicator to discriminate between dust-rich and dust-poor in neutral gas in and around galaxies.Comment: 10 pages, 8 figures, accepted for A&

When prices hardly matter: Incomplete insurance contracts and markets for repair goods

This paper locks at markets charaterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequences of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insured's actual expenses, i. e., the insured would be partially or completely reimbursed when purchased certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon on development of prices and the market structure in markets with insured customers, and, on the other hand, the resulting backlash on optimal insurance contracting. --insurance,incomplete contracts,repair markets

When prices hardly matter: Incomplete insurance contracts and markets for repair goods

This paper looks at markets characterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequences of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insured’s actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon the development of prices and the market structure in markets with insured customers, and, on the other hand, the resulting backlash on optimal insurance contracting.Incomplete Contracts, Insurance, Repair Markets