Catastrophe Risk And Dispersion Mechanism

China is a country with high frequency of catastrophic events. The average economic damage causing by catastrophic events in China was over RMB 100 billion per year in1990s. Such high cost has constrained the economic development of China. However, the corresponding research on catastrophe risk, especially on the catastrophe risk managing of insurance company is relatively not up to date in China. Insurers in China would probably not be able to bear the loss claims once the catastrophic event happen for two possible reasons: one is their shortage of capital, the other is their imperfect or even backward techniques of catastrophe risk managing. All these make it become an important issue that how to transfer the catastrophe risks underwritten by insurers. The paper is composed of preface and contents that include four sections. Section Ⅰ gives a brief introduction to the catastrophe risk conditions in the world. The definition of catastrophe risk is that the uncertainty of losses resulting from a catastrophic event given a period. Sigma divides catastrophe risk into two categories: natural catastrophe which is taken to mean an event caused by natural forces, and man-made disasters arising in conjunction with human activities. From the analysis of the statistics of global catastrophic events, we can draw a conclusion as follow: the scale of natural catastrophes and man-made disasters has been on the increase since 1970, along with the extraordinarily strong fluctuations in the insurance claims burden. The research also finds that growing population densities, increasing wealth, and rising concentrations of property in endangered areas have created a clear long-term trend toward natural catastrophe losses of increasing severity.Section Ⅱ explores reinsurance, the traditional method of catastropherisk transferring. Reinsurance has long been played an important role in the managing of catastrophe risk of insurers since it came into being. Insurers can employ reinsurance methods to transfer catastrophe risks to reinsurers and therefore to maintain their financial stability. Different type of reinsurance can impose different effect on risk transfer. For example, excess of loss reinsurance can smooth the fluctuations in insurer's claims burden, whereas quota share reinsurance cannot. An analysis of 13 important reinsurance markets showed that the sustained collapse in catastrophe excess loss reinsurance (CatXL reinsurance) prices seen since 1994 came to an end in 2000, and the 16% rise in the price index of the markets signals a trend reversal. It is foreseen that a further average price increase of over 40% is needed in order for CatXL reinsurance business to become profitable again.Section Ⅲ looks in detail at the insurance risk securitizations, the innovations in managing catastrophe risk. A series of major catastrophes can precipitate a shortage of global property catastrophe reinsurance capacity, driving up prices. In reaction to this rate spike, some insurers began developing a new class of financial instruments that transfer insurance risk to capital market. Approximately USD 12.6 billion worth of these capital market insurance solutions have been issued worldwide in the past five years. Nearly two-thirds of these transactions involved catastrophe risks. Catastrophe bonds, catastrophe swaps, contingent capital, and catastrophe options are the four main instruments of catastrophe risk securitizations. Insurance risk securitization has some advantages comparing to reinsurance ways. For insurers, securitization has pricing and availability advantages. Moreover, capital market insurance solutions can be structured to minimize credit risk which is unavoidable on reinsurers. The study illustrates the relative advantages of securitizational instruments comparing with traditional catastrophe reinsurance by employing the theories of actuarial science. There are tenfactors critical to the development of catastrophe risk securitization: reinsurance prices; liquidity; transparency; resolution of...