Impact of capacity level on reinsurance and cat bond markets

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2012
Kerman, T. Toygar
Reinsurance is one of the most important tools to be used by insurance companies, for managing risks. This is an effective way; however, there are situations where reinsurance is insufficient, such as the occurrence of a natural hazard. When a natural hazard occurs, many insured experience loss at the same time, which drains the reinsurance market capacity. If future market capacity could be forecasted, then it would be easier for companies to decide when to include cat bonds or any other additional securities in their portfolio. In order to establish a model for market capacity, its relationship with other market parameters and the association among parameters are examined. In this study, these relationships are analyzed and used to establish an algorithm for predicting the next years reinsurance capacity. Moreover, last 10-year data for market capacity is used to establish and AR(1) model, in order to create a comparison with the algorithm. A case study of cat bonds is done, which uses the pricing load calculation of the Lane model and aims to ease the decision-making process by comparing the loads of cat bond and reinsurance pricing.

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Citation Formats
T. T. Kerman, “Impact of capacity level on reinsurance and cat bond markets,” M.S. - Master of Science, Middle East Technical University, 2012.