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Elaborating a Catastrophic Loss Index for Insurance-linked Securities (ILS): A Continuous Model

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  • Pérez-Fructuoso María José

    (Madrid Open University (UDIMA), Spain)

Abstract

This paper proposes a continuous random modeling of catastrophic loss indexes underlying insurance-linked securities (ILS), by convolution of each catastrophic event's amount of reported claims. This variable is calculated, in turn, as the difference between the catastrophe's total severity, on one hand, and its amount of incurred-but-not-yet-reported claims, which is considered to be driven by a geometric Brownian motion, on the other hand. Parameters estimation and verification of the goodness-of-fit to a sample of data series on floods in Spain have subsequently been conducted in order to test the model's validity.

Suggested Citation

  • Pérez-Fructuoso María José, 2009. "Elaborating a Catastrophic Loss Index for Insurance-linked Securities (ILS): A Continuous Model," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 3(2), pages 1-13, April.
    • Handle: RePEc:bpj:apjrin:v:3:y:2009:i:2:n:3
    DOI: 10.2202/2153-3792.1038
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    References listed on IDEAS

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    1. Lee, Jin-Ping & Yu, Min-Teh, 2007. "Valuation of catastrophe reinsurance with catastrophe bonds," Insurance: Mathematics and Economics, Elsevier, vol. 41(2), pages 264-278, September.
    2. Geman, Helyette & Yor, Marc, 1997. "Stochastic time changes in catastrophe option pricing," Insurance: Mathematics and Economics, Elsevier, vol. 21(3), pages 185-193, December.
    3. J. David Cummins, 2007. "Reinsurance for Natural and Man‐Made Catastrophes in the United States: Current State of the Market and Regulatory Reforms," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 10(2), pages 179-220, September.
    Full references (including those not matched with items on IDEAS)

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