Analysis Of Valuation Of Catastrophe Reinsurance With Catastrophe Risk

Recent years, catastrophe disasters happen more and more frequent, which can cause substantial financial losses. However traditional reinsurance can't satisfy the basic need of reinsurance companies to diversify and transfer catastrophe risk. In this case, insurance-linked securities are invented as an important financial innovation to transfer risk from insurance markets to financial markets. Recently, little research has done to discuss the impact of the issue of CAT bonds on the reinsurance contract' valuation and default risk. Most of the former study is conducted qualitatively, and never build the models to compute the change of the values of reinsurance contract, default risk, basic risk, and interest risk after issuing the CAT bonds.In this paper, we select the Indexed CAT bond which is the most active and promising in the insurance-linked securities markets as our major research object. We build the models to value the reinsurance contracts and get the asset, liability, interest, and catastrophe loss processes under the risk-neutral measure. We haven't get the closed form formula of the valuation, however we use the Monte Carlo simulation method to compute the value of the reinsurance contract with no default risk, default risk premium, basic risk premium, interest risk premium, and examine how a reinsurance company can increase the value of a reinsurance contract and reduce its default risk by issuing catastrophe bonds. At last, we use the actuarial approach to price the indexed option and bonds, this approach can be used in an arbitrage, none equilibrium or incomplete market.The results of this paper can support the research "the requirement of the issuing of CAT bonds" in theory, and it can guide the reinsurance companies'default risk management and interest risk management through issuing CAT bonds, so as to increase the value of the reinsurance contracts. At the same time, it provides a reasonable basis for the valuation of catastrophe derivate products, and it has great meanings on intensify the knowledge of insurance-linked securities.