Design and pricing of a transparent parametric-modeled loss CAT bond: application to German windstorm

RESUMO

Catastrophe bonds tap capital markets to supplement reinsurance capacity. This work introduces an innovative cat bond framework addressing the established tension between moral hazard and basis risk. The authors propose a trigger mechanism which is entirely transparent and simpler to evaluate compared to indemnity modeling techniques, plus corresponding pricing methodology. The trigger derives from a cost random field integrating physical hazard, vulnerability function, and exposure, enabling flexible positioning between parametric and modeled loss approaches. Using German windstorm data, researchers fit max-stable random fields at industry-standard resolution and calibrate vulnerability components using historical loss and exposure information. The analysis includes basis risk measurement and comprehensive model assessment with numerical findings. [abstract paraphrased by fetch summarizer]