Mitigating Extreme Risks Through Securitization
University of Iowa, USA
Recent decades have seen an unprecedented surge in the frequency and severity of catastrophes, be they natural (such as earthquakes, floods, droughts, hurricanes, tsunamis, and wildfires) or man-made (such as terrorist attacks, financial crises, and wars), all of which wrought havoc on the environment, economy, and society on a large scale despite their low likelihood of happening. This has caught much attention from academics, practitioners, and regulators. In particular, various Insurance-Linked Securities (ILS) as risk transfer mechanisms have been devised in this general trend, in addition to traditional reinsurance, to help insurers and reinsurers transfer catastrophe risks to the capital market. So far, the most successful ILS in the market are Catastrophe (CAT) bonds and Industry Loss Warranties (ILWs). In this talk we shall discuss issues of pricing CAT bonds and quantifying the basis risk of ILWs. To tackle these issues, we shall mainly employ techniques from Extreme Value Theory (EVT).
This talk is based on several recent joint works with Zhongyi Yuan at the Pennsylvania State University.