Accuracy of Premium Calculation Models for CAT Bonds—An Empirical Analysis

Authors

  • Marcello Galeotti,

    1. Marcello Galeotti is at the Department of Mathematics for Decisions, University of Florence. He can be contacted via e-mail: marcello.galeotti@dmd.unifi.it. Marc Gürtler is at the Department of Finance, Braunschweig Institute of Technology. He can be contacted via e-mail: marc.guertler@tu-bs.de. Christine Winkelvos is at the Department of Finance, Braunschweig Institute of Technology. She can be contacted via e-mail: c.winkelvos@tu-bs.de. Earlier versions of this article are known under the title “Accuracy (and Determining Factors) of Pricing Models for CAT Bonds—An Empirical Analysis” and “Determining Pricing Factors of CAT Bonds.”  We would like to thank Andre Liebenberg, Tristan Nguyen, and Barbara Klimaszewski-Blettner for their discussions. We would also like to thank J. David Cummins, Richard D. Phillips, Kim B. Staking, Pierre Picard, and an anonymous referee as well as the participants of the 2009 Annual Meeting of the American Risk and Insurance Association, the 2009 and 2010 Annual Congress of the German Insurance Association, and the 2010 Annual Meeting of the Western Risk and Insurance Association for interesting and helpful comments.
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  • Marc Gürtler,

    1. Marcello Galeotti is at the Department of Mathematics for Decisions, University of Florence. He can be contacted via e-mail: marcello.galeotti@dmd.unifi.it. Marc Gürtler is at the Department of Finance, Braunschweig Institute of Technology. He can be contacted via e-mail: marc.guertler@tu-bs.de. Christine Winkelvos is at the Department of Finance, Braunschweig Institute of Technology. She can be contacted via e-mail: c.winkelvos@tu-bs.de. Earlier versions of this article are known under the title “Accuracy (and Determining Factors) of Pricing Models for CAT Bonds—An Empirical Analysis” and “Determining Pricing Factors of CAT Bonds.”  We would like to thank Andre Liebenberg, Tristan Nguyen, and Barbara Klimaszewski-Blettner for their discussions. We would also like to thank J. David Cummins, Richard D. Phillips, Kim B. Staking, Pierre Picard, and an anonymous referee as well as the participants of the 2009 Annual Meeting of the American Risk and Insurance Association, the 2009 and 2010 Annual Congress of the German Insurance Association, and the 2010 Annual Meeting of the Western Risk and Insurance Association for interesting and helpful comments.
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  • Christine Winkelvos

    1. Marcello Galeotti is at the Department of Mathematics for Decisions, University of Florence. He can be contacted via e-mail: marcello.galeotti@dmd.unifi.it. Marc Gürtler is at the Department of Finance, Braunschweig Institute of Technology. He can be contacted via e-mail: marc.guertler@tu-bs.de. Christine Winkelvos is at the Department of Finance, Braunschweig Institute of Technology. She can be contacted via e-mail: c.winkelvos@tu-bs.de. Earlier versions of this article are known under the title “Accuracy (and Determining Factors) of Pricing Models for CAT Bonds—An Empirical Analysis” and “Determining Pricing Factors of CAT Bonds.”  We would like to thank Andre Liebenberg, Tristan Nguyen, and Barbara Klimaszewski-Blettner for their discussions. We would also like to thank J. David Cummins, Richard D. Phillips, Kim B. Staking, Pierre Picard, and an anonymous referee as well as the participants of the 2009 Annual Meeting of the American Risk and Insurance Association, the 2009 and 2010 Annual Congress of the German Insurance Association, and the 2010 Annual Meeting of the Western Risk and Insurance Association for interesting and helpful comments.
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Abstract

CAT bonds are of significant importance in the field of alternative risk transfer. Because the market of CAT bonds is not complete, the application of an appropriate pricing model is of high relevance. We apply different premium calculation models to compare them with regard to their predictive power. Without taking the financial crisis into account, a version of the Wang transformation model and the linear model are the most accurate ones. In contrast, under consideration of the financial crisis, all analyzed models are approximately equivalent. Furthermore, we find that CAT bond specific information does not improve out-of-sample results.

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