Hedging Flood Losses Using Cat Bonds
Autor: Alexandre Têtu • March 6, 2018 • Thesis • 13,625 Words (55 Pages) • 528 Views
Hedging flood losses in Quebec using Cat-Bonds
Alexandre Têtu
Department of Finance, Insurance and Real Estate
Faculty of Business Administration
Laval University, Quebec, Canada
Email: alexandre.tetu.1@ulaval.ca
Van Son Lai
Department of Finance, Insurance and Real Estate
Faculty of Business Administration
Laval University, Quebec, Canada
Email: vanson.lai@fas.ulaval.ca
Issouf Soumaré
Department of Finance, Insurance and Real Estate
Faculty of Business Administration
Laval University, Quebec, Canada
Email: issouf.soumare@fsa.ulaval.ca
and
Michel Gendro
Department of Finance, Insurance and Real Estate
Faculty of Business Administration
Laval University, Quebec, Canada
Email: issouf.soumare@fsa.ulaval.ca
November 2012
We thank the Fonds Conrad Leblanc and the Institut de Finance Mathématique of Montréal (IFM²) for their financial support. We thank Sylvain Tremblay from the Quebec Public Safety Department, Marie-Claude Beaulieu and Catherine Cournoyer. All errors and omissions are the authors’ sole responsibilities.
Hedging flood losses in Quebec using Cat-Bonds
Abstract
In this paper, we develop a methodology to model the risk of losses due to a disaster in which the jump process has an upward trend and a seasonal effect. We applied this model to losses in the financial assistance program in case of flooding of the Government of Quebec. The results that we obtain when calibrating our intensity function of the non-homogeneous Poisson process confirm the presence of an upward trend in the number of events of flooding and of a seasonal cyclical effect. According to this model, we evaluate the level of hedging that would have resulted in the lowest cost to the government during the last 19 years. We show that, if they required a risk premium of 2.69 times the expected losses, the performance for the past 19 years of a Cat-Bond on the floods in Quebec would have been very interesting for investors compared to the performance of the S&P/TSX. Especially in the case of the inclusion of federal aid, Based on existing literature, we note that the time of issuance of catastrophe bonds is an important factor in the level of premium required by the market. We use levels historically observed risk premiums to provide a price range for the issuance of catastrophe bonds that would allow the Department of Public Safety to hedge its risk linked to flood losses in the coming years.
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