Catastrophe Risk Securitization

Something unexpected may happen any time. From 1980s, more and more catastrophes occurred in many areas. From the aspect of supply and demand, the traditional insurance is becoming saturated. But the demand for catastrophe insurance is greater than supply. This is an austere challenge to insurance industry. Both the insurance industry and government have to tend to alternative transforming of catastrophe risk. The technology of securitization, which came forth in 1990s, established an important link between the insurance industry and the capital market. Through issuance the insurance-linked securities, insurance companies can not only acquire large amounts of funds from capital market, but also hedge their exposures by transferring risk to investors, which enhances the capability of insurance industry. Investors can gain high yield unaffected by financial market variable because of the characteristic of independence between insurance risk and economic variable. Because of this, I select "securitization of catastrophe risk" as my graduate thesis.The structure of the paper is as follows. Section 1 discusses the evolution of insurance securitization as a financial risk management tool. Section 2 describes some of the most important securitization products, which have been introduced, and selects one product for our country to attempt to. Section 3 compares the securitization with traditional ways for the insurer to assume catastrophe risk. These are the factors which have accompanied its introduction, and the reasons typically given for its recent development. Section 4 focuses on actuarial aspects of catastrophe risk bond, such as pricing, and deduces a pricing model. Section 5 puts forward some thoughts regarding to establish the government backed catastrophe risk fund to cover the loses resulted from catastrophe. Based on the situation of our country, we can raise funds through government financing and commercial channels to build our guarantee system of catastrophe risk.