Hybrid Cat-Bonds

26 Pages Posted: 10 Oct 2007

See all articles by Pauline M. Barrieu

Pauline M. Barrieu

London School of Economics & Political Science (LSE)

Henri Loubergé

University of Geneva - Geneva School of Economics and Management; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007


Natural catastrophes attract regularly the attention of media and have become a source of public concern. From a financial viewpoint, natural catastrophes represent idiosyncratic risks, diversifiable at the world level. But for reasons analyzed in this paper reinsurance markets are unable to cope with this risk completely. Insurance-linked securities, such as cat bonds, have been issued to complete the international risk transfer process, but their development is disappointing so far. This paper argues that downside risk aversion and ambiguity aversion explain the limited success of cat bonds. Hybrid cat bonds, combining the transfer of cat risk with protection against a stock market crash, are proposed to complete the market. Using the concept of market modified risk measure, the paper shows that replacing simple cat bonds with hybrid cat bonds would lead to an increase in market volume.

Keywords: Risk management, Risk transfer, Catastrophes, Risk measures, Reinsurance, Optimal design

JEL Classification: D81, G22

Suggested Citation

Barrieu, Pauline M. and Loubergé, Henri, Hybrid Cat-Bonds (September 2007). Swiss Finance Institute Research Paper No. 07-27. Available at SSRN: https://ssrn.com/abstract=1016028 or http://dx.doi.org/10.2139/ssrn.1016028

Pauline M. Barrieu

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://stats.lse.ac.uk/barrieu/

Henri Loubergé (Contact Author)

University of Geneva - Geneva School of Economics and Management ( email )

Uni Mail
Bd du Pont-d'Arve 40
Geneva, 1211

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

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