A Study on Catastrophe Bonds and Index Insurance

In the presence of natural disasters, such as earthquakes, hurricanes, and floods, insurance companies may face tremendous losses beyond their capacities. To address this situation, catastrophe bonds (CAT bonds) have been developed to transfer catastrophic losses from the insurance community to the capital market. Typically, insurance companies (or their agents) issue CAT bonds to investors seeking high-risk, high-return investment opportunities and are willing to reimburse the bond issuers in the event of specific catastrophe events. Index insurance is an instrument similar to CAT bonds but transfers risks within the insurance community, from the insureds to insurers. While these two instruments have been widely used in practice, they have several limitations that call for improvements in their design to enhance applicability.

In this project, we aim to (i) collect literature and real-life examples of CAT bonds and index insurance products, (ii) summarize common product design and pricing models, and analyze their limitations, and (iii) develop new models to address those limitations and implement them with case study demonstrations.

Supervisor: Wei Wei

Graduate Supervisor: Andres Medina Landeros