The Pot Model For Storm Surge Catastrophe Bonds

As a catastrophe-prone country, China suffers a loss estimated to hundreds of billion dollars every year caused by natural disasters. Such a great loss has definitely dwarfed the security and compensation functions of the current insurance system, which poses severe challenge to the entire insurance industry in China. As an important and innovative tool recently appearing in the international risk management area, insurance risk securitization systematically combines the insurance industry and capital market together and effectively supplements or replaces the traditional insurance risk management by greatly dispersing the insurance risk in a broader capital market and dramatically increasing the capability of insurance industry. Catastrophe bond is the most successful product of catastrophe risk securitization.Statistics of extremes, a discipline which mainly studies the statistical regularity of the random events with respect to extreme cases, has increasingly widespread application in the recent financial area.In this paper, the author will probe into the feasibility and necessity of issuing storm surge catastrophe bonds in China based on a systematical analysis of such an innovative tool by using the fundamental principles of Finance, Insurance, and Actuarial Science. The POT model in statistics of extremes is discussed in details and a statistical analysis of the past years'storm surge catastrophe loss data is conducted through the application of POT model, by doing which the author preliminarily draws the distribution of storm surge catastrophe loss. Finally, a simple storm surge catastrophe bond is constructed based on some relevant knowledge in the fields of Finance and Actuarial Science.