Research On The Pricing Of China Earthquake Catastrophe Bond

It is shown by the result of one of the study of Swiss Re that the frequency of catastrophe's outbreaking in the world has been in a rising tendency since 1970s. At the same time, the economic losses caused by the catastrophe have also increased significantly. Insurance companies underwriting such catastrophe risks are suffering growing losses. An insurance company is likely to be in a trouble because of successive catastrophe claims. Thus the reinsurance came into being.Insurance companies'funds were stretched when they are in the face of a growing number of catastrophe claims. Therefore, some people started to look for a strong financial support from the capital market. The result of securitization of catastrophe risks was the appearance of a lot of insurance linked securities products, such as catastrophe options, catastrophe futures, and catastrophe bonds.Firstly, this paper starts from the structure of this kind of bond. By analyzing the advantages and disadvantages and the feasibility of such bonds, this paper fully explains the reason for the great development rapid that catastrophe bonds take precedence over other insurance linked securities in the financial market.Secondly, this paper mentions earthquake which will be faced with by nearly every country in the world. Seeing China as the background and the earthquake bonds as the theme, this paper make a presentation and summary on complete markets and incomplete markets. A difficult problem about the pricing of catastrophe bonds is also issued on the above basis.Thirdly, the balanced pricing theory based on the incomplete market and Monte Carlo simulation methods are studied in this paper as well. The moral risk factor which cannot be ignored is added to the Monte Carlo simulation and a new model is established. Meanwhile, this paperd collected the data being relevant to the earthquakes between 1979-2010 which suffered direct economic losses of more than 100 billion yuan and used the Eviews software which is quite simple to operate. As a result, the conclusion that the distribution of losses of earthquake catastrophe is Lognormal Distribution is gained. CAPM and the binomial pricing of catastrophe bonds to are also used to analyze the pricing of these bonds. Once again, the point that the market that catastrophe bonds in is not complete is confirmed from an empirical view. The Binomial Distribution added with Moral factors is used to design the earthquake catastrophe bond in China and establish the formulation of the price system.