Research On Catastrophe Bond Issuing Of Catastrophe Compensation Fund

Catastrophe is described as paroxysmal, unexpected, inevitable and very serious. Our country is with all kinds of natural calamities, flood and earthquake brings us substantial loss of assets and life.The traditional catastrophe risk dispersing mechanism is catastrophe insurance. Although catastrophe events rarely happen, they make huge loss. A catastrophe event will suffer a lot of insurance applicant, and accumulate huge claim money to insurer. The amount maybe is multiples of insurer's capital, even multiples of the whole reinsurance market's capital. Therefore, even in counties of developed insurance industry, such as the USA, European and Japan, the catastrophe insurance is in short supply.In china, for we don't have mature and complete catastrophe insurance system, the catastrophe loss compensation relies on government relief. It makes government bears a heavy fiscal burden. Accordingly, we design a catastrophe compensation fund which is controlled by the government, and make it a supplement of government fiscal compensation when the catastrophe event happens.The aforementioned catastrophe compensation fund raises money from a variety of source. For instance, the government's catastrophe fiscal allocation, society endowment, the fund investors'fund stake and the fund's investment profit. Aside from these sources, we can issue insurance securitization products to raise capital for catastrophe compensation fund. Securitization products'sponsor is exposed by catastrophe risk, therefore our catastrophe compensation fund can act as sponsor. Catastrophe bond is the most popular insurance securitization product in the world, and is the most realistic choice of our country. Hence, the essay firstly introduces the substance of catastrophe bond, then analyses the participants, risk, structure, approaches and size of issuing cat bond. We combine theory and reality, and stand at the catastrophe compensation fund's point of view to discuss the way of issuing catastrophe bond in china. It is the most import innovation of this essay.The essay contains ten parts.Chapter 1 is forward. Based on the introduction of catastrophe compensation fund's operation, we make the goal of the essay clear—how catastrophe compensation fund could issue catastrophe bond, and make it the financing source of the fund. Catastrophe bond (cat bond) is a sort of securitization of insurance risk. At last, we summarize the researches of cat bond home and abroad.Chapter 2 is the summary of cat bond. It comes from the reinsurance of catastrophe risk. First, we compare the main forms of catastrophe risk dispersion in the worldwide, except traditional reinsurance. We conclude that cat bond is the optimal choice. Then, we introduce the issue of cat bond. At the beginning, in order to disperse catastrophe risk, the promoter (catastrophe compensation fund) sets a special purpose vehicle (SPV), and then signs a reinsurance contract with it. SPV demands bond principals as bond sponsor, combined it with the reinsurance fee from the promoter, then make short time investment. Usually, some of the capital is invested in high quality bonds; some of them is invested in short term securities, and swaps with a trust company to get defined LIBOR+spread.If no promissory catastrophe events happen, bond investors will get all the principal and interests. If the events indeed happen, the loss of principal and interests will depend on items of different contracts. Then, we discuss cat bond's structure, especially the cat bonds issued by catastrophe compensation fund. At last, we analyze the pro and cons of cat bond. Cat bond have shortcomings in credit rating and issue cost, so bond price will be higher. Furthermore, cat bond has low liquidity, so pricing for cat bond is difficult. But, the benefit rate of cat bond is high, and it has low credit risk and interest risk, so cat bond is good for investment risk dispersion.In Chapter 3, we discuss the participants of issuing cat bond. We analyze the advantage of catastrophe compensation fund acts as bond promoter, and how to choose SPV in the context of our country's laws and regulations.In Chapter 4, we discuss the catastrophe compensation fund's risk of issuing cat bond. There are basis risk, moral risk, adverse selection and model risk. We analyze the reason of each risk, how these risk been reflected in the operation of cat bond, and how to mitigate these risk. In Chapter 5, we discuss the structure of cat bond. There are trigger design, compensation rate design, term structure design, interest structure design, bond issuing timing design, district design and risk structure design. First of all, we discuss the key of cat bond structure design—trigger design. Now, the main forms of trigger are loss compensation trigger, industry index trigger, pure parametric trigger, parametric index trigger, model loss trigger, MITT trigger and mixed type trigger. We analyze each type of trigger thoroughly; give several instance and pros and cons. At last, we compare and summarize these triggers, and discuss how to select the optimal trigger in our country. In the rest part, we analyze the other six structures similarly.In Chapter 6, we discuss the approaches of issuing cat bonds. There are public offerings at home, public or private offerings abroad, or in Hongkong.In Chapter 7, we discuss the issuing size of cat bond. When ascertaining the size of cat bond, we must consider the size of catastrophe compensation fund, the approach of issuing and how to dilute trading cost and liquidity discounting.In Chapter 8, we discuss the credit rating and credit enhance of cat bond. Our country's credit rating institutions lack experience in rating insurance securitization products, so we can ask international well-known credit rating corporation for help.In order to enhance the credit rating, cat bond's optimal choices are credit swap, classification and the third party guarantee.In Chapter 9, we discuss the problems faced and the corresponding solution. The main problems are:investors aren't familiar with cat bond, risk evaluation is difficult, there are no corresponding regulations and laws about cat bond, the international financial crisis intimidate the security of credit account, etc. This part considers the factual instance and regulations and laws of our country.