Study On The Pricing Of Flood Insurance Bonds Based On Monte Carlo Simulation

The economic development of our country has played a serious negative effect due to the huge amount of annual losses caused by flood disaster. In some years flood losses even accounted for1%of the Gross National Product. If flood catastrophe bonds could be introduced in China, the risk of flood would be transferred to the strength of capital markets, which would improve China’s insurance industry insurance capacity, expand business; also could ease the financial pressure on the government, abundant capital market investment structure, and promote the diversification of capital markets. From these points of view, introducing flood insurance bond in our country is very necessary.The paper draws lessons from foreign catastrophe risk bond method and mode of operation, and various elements of the bond issuance of the flood insurance bond elements have been a research object. First we have analysis of the necessity and feasibility from the introduction of flood disasters in China with the perspective of the insurance market, capital markets, national financial and so on. And then discuss the operation mode of flood insurance bond. Finally, On the basis of the current situation, the restricting factors of the issue of flood insurance bonds in China is analyzed from the technical level, the system level and market environment.This paper draw on foreign catastrophe risk securitization methods and operating patterns, the flood insurance elements of bond issue as the research object, as well as Monte Carlo method is applied to our country flood disaster data simulation. In this paper, the flood catastrophe data from1985to2011in China floods in direct economic losses which are above100million Yuan is collected as a sample data that is a random variable quantity in flood losses, Ultimately concluding the distribution fitting for the losses and occurrences on China’s flood disaster, in the meantime this paper make a fitting of the flood loss amount and number of times. Different triggers of the corresponding probability are calculated by using the Monte Carlo simulation method with the selection of (600,0.1805),(900,0.0888),(2700,0.0101) three points as the principal respectively that flood bonds, principal of50%that type of flood bonds and principal confiscated flood the bonds of triggers. Finally, different types of flood disaster bond yields and prices are calculated by using the catastrophe bonds pricing principle of the capital asset pricing model. Hoping for this paper could provide some help for the issuance and operation of flood insurance bond.