Research On The Development Of Catastrophe Bonds

Natural disasters occur frequently in most parts of China, nearly half of the citieslocate in earthquake zones and nearly2/3of the areas are subject to varying degreesof flood threat. As one of the countries which is seriously affected by the typhoon inthe world, China’s coastal areas are often suffer from typhoons attacks. With the rapideconomic development of our society and the increasing population density, economiclosses caused by catastrophe for our country are getting bigger and bigger. Currently,due to limited economic conditions, low acceptable level of insurance, small size ofthe insurance coverage, low insured and few types of disasters insurance, in mostcases, losses and reconstruction need to rely on government expenditure, but just to beable to guarantee the minimum relief. Therefore, for the prevention and control andthe subsequent catastrophe relief compensation mechanism is particularly important.Nearly two decades, in global market, if small or medium-sized disaster occurs,commercial insurance companies bear most of the losses. If big natural disaster occurs,most of the losses will be bear by the reinsurance company or by the capital market.The government becomes the last insurer only when rare catastrophe for that. Basedon this concept, in recent years, catastrophe risk securization is developing rapidly. Ithas become an effective way to disperse catastrophic risk in global market.Catastrophe bond is the most widely acceptable of catastrophe risk securizationproducts. Catastrophe bonds has unique advantage in risk diversification andcompensation for losses, it allows not only the insured to be able to get in thepost-disaster reconstruction funds, in order to ease the pressure on the insurancemarket, but also enable investors in the capital market for bond investment incomeactive in the development of the capital market, therefore, it is the most suitedderivative products to China.The article has reviewed the former research of catastrophe bond, analyzedcatastrophe bond’s generation and development process, transaction mechanism aswell as successful catastrophe bond case study. This article collects typhoons disasterdata between1993and2010which happened in China and uses Wang two-factormodel on the empirical distribution adjustment. These analyses show that differenttrigger point of one-year typhoon bonds in China, in order to provide theoreticalsupport for issuing catastrophe bonds.