Catastrophe Insurance Securitization Study

Since1970, serious natural disasters continue to occur worldwide, catastrophesprevent economic and social development. Though catastrophe has low frequency, ithas huge damage, generate huge economic losses and it is difficult to obtain reliablepredictions. China is one of the areas that natural disasters influence the most, amongall the disasters that impact the most in China, typhoons are the main disastersinfluence China’s coastal provinces and parts of inland area, Zhejiang province islocated in the eastern coastal area of China, which province is prone to typhoondisaster, typhoon caused serious economic losses to Zhejiang province. Underwritingcapacity of China’s insurance industry is not enough and has limitations of reinsurancesystem, so it is urgent to find a solution to disperse catastrophe risk to replacetraditional reinsurance way, therefore it necessary to develop catastrophe insurancerisk securitization, especially the typhoon risk securitization.In this paper, aiming at typhoon disasters among various catastrophes, combinedby actual situation about typhoon disaster of Zhejiang province, we can obtaintyphoon disaster losses distribution, disaster frequency distribution and thecorresponding typhoon catastrophe bond prices, so we can design typhoon catastrophebond to meet the characteristics of typhoon disaster in Zhejiang area. Through thispaper can have more clearly and comprehensive understanding about productcharacteristics, operation mechanism and bond pricing model of catastrophe, and getrid of broad but not specific application of catastrophe bonds. It is more profound touse specific typhoon disaster data in Zhejiang for designing product.This paper firstly introduces defects existing in traditional catastrophe insuranceand characteristics of catastrophe disaster, which leads to connection with capitalmarket, and necessity of realize innovative catastrophe reinsurance---catastropheinsurance risk securitization, and specifically introduce catastrophe insurance risksecuritization, focus on catastrophe bond in detail; second, this paper discussesnecessity and feasibility of introducing catastrophe bonds in china from two aspects:China’s catastrophe risk management system and the capital market; third, make fullstudy about catastrophe bond pricing models, and put forward modified catastrophebond pricing model of the empirical application; forth, introduce temporalcharacteristics of Zhejiang typhoon disaster and disaster loss distribution, among theprocess of catastrophe bond pricing, considering outer factors (such as moral risk), so we can design catastrophe bond based on Zhejiang typhoon disaster. In the end, thispaper put forward conclusion and suggestions, define the role of government in theoperation mechanism of catastrophe bond, namely government should be thedominant power in catastrophe bonds operation, and it should establish catastropheinsurance fund, make catastrophe bond as supplement to traditional reinsurancemechanism, so as to perfect the system of catastrophe risk management in China.