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Multiple-Trigger Catastrophe Bond Pricing Model and Its Simulation Using Numerical Methods

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  • Riza Andrian Ibrahim

    (Master of Mathematics Study Program, Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Sukono

    (Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Herlina Napitupulu

    (Department of Mathematics, Faculty of Mathematics and Natural Sciences, Universitas Padjadjaran, Sumedang 45363, Indonesia)

Abstract

Investor interest in single-trigger catastrophe bonds (STCB) has the potential to decline in the future. It is triggered by the increasing trend of global catastrophe loss and intensity every year, which increases the probability that a claim of STCB will occur. To increase investor interest again, the issuance of multiple-trigger catastrophe bonds (MTCB) can be one solution. However, to issue MTCB, its pricing is more complex because it involves more factors than STCB. Therefore, this study aims to design a simple MTCB pricing model. The claim trigger indices used are actual loss and fatality. Then, a nonhomogeneous compound Poisson process is used to model actual losses and fatalities aggregate to consider catastrophe intensity. In addition, this study proposes numerical methods, namely the continuous distribution approximation method and the Nuel recursive method, to facilitate the application of the model. Finally, an analysis of the effect of catastrophe intensity and other factors on MTCB prices is also presented. This study is expected to help special-purpose vehicles as MTCB issuers in MTCB pricing.

Suggested Citation

  • Riza Andrian Ibrahim & Sukono & Herlina Napitupulu, 2022. "Multiple-Trigger Catastrophe Bond Pricing Model and Its Simulation Using Numerical Methods," Mathematics, MDPI, vol. 10(9), pages 1-17, April.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:9:p:1363-:d:797065
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    References listed on IDEAS

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    3. Yifan Tang & Conghua Wen & Chengxiu Ling & Yuqing Zhang, 2023. "Pricing Multi-Event-Triggered Catastrophe Bonds Based on a Copula–POT Model," Risks, MDPI, vol. 11(8), pages 1-19, August.
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    8. Riza Andrian Ibrahim & Sukono & Herlina Napitupulu & Rose Irnawaty Ibrahim, 2023. "How to Price Catastrophe Bonds for Sustainable Earthquake Funding? A Systematic Review of the Pricing Framework," Sustainability, MDPI, vol. 15(9), pages 1-19, May.
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