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Catastrophe Insurance Options: Are They Zero-Beta Assets?

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  • Robert E. Hoyt
  • Kathleen A. McCullough

Abstract

PCS Catastrophe Insurance Options were released in 1995 as a means of providing property and casualty insurers with a method of hedging catastrophe exposures. The options are based on the Property Claims Services Office (PCS) index of catastrophe losses. Due to the fact that the underlying index is uncorrelated to movements in the capital markets, it is believed that PCS Catastrophe Insurance Options represent zero-beta assets. If this is true, then investment in catastrophe options provides investors with a way to further diversify the current asset portfolios, thereby improving portfolios’ reward-to-variability ratios. This study reviews actual PCS Catastrophe Insurance Options performance to assess whether the hypothesis that these contracts represent zero-beta assets is supported. In spite of relatively low liquidity in this market thus far, our results do suggest that the actual contracts do represent zero-beta assets.

Suggested Citation

  • Robert E. Hoyt & Kathleen A. McCullough, 1999. "Catastrophe Insurance Options: Are They Zero-Beta Assets?," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 22(2), pages 147-163.
    • Handle: RePEc:wri:journl:v:22:y:1999:i:2:p:147-163
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    Cited by:

    1. Pauline Barrieu & Henri Loubergé, 2009. "Hybrid Cat Bonds," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 547-578, September.
    2. Karl Demers‐Bélanger & Van Son Lai, 2020. "Diversification benefits of cat bonds: An in‐depth examination," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 29(5), pages 165-228, December.
    3. John Lewis, 2010. "Reinsurers as financial intermediaries in the market for catastrophic risk," DNB Occasional Studies 802, Netherlands Central Bank, Research Department.
    4. Eckhard Platen & David Taylor, 2016. "Loading Pricing of Catastrophe Bonds and Other Long-Dated, Insurance-Type Contracts," Papers 1610.09875, arXiv.org.
    5. Burnecki, Krzysztof & Giuricich, Mario Nicoló & Palmowski, Zbigniew, 2019. "Valuation of contingent convertible catastrophe bonds — The case for equity conversion," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 238-254.
    6. Darius Lakdawalla & George Zanjani, 2012. "Catastrophe Bonds, Reinsurance, and the Optimal Collateralization of Risk Transfer," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(2), pages 449-476, June.
    7. Chang Carolyn W. & Feng Yalan, 2021. "Hurricane Bond Price Dependency on Underlying Hurricane Parameters," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 15(1), pages 1-21, January.
    8. Ben Ammar, Semir & Braun, Alexander & Eling, Martin, 2015. "Alternative Risk Transfer and Insurance-Linked Securities: Trends, Challenges and New Market Opportunities," I.VW HSG Schriftenreihe, University of St.Gallen, Institute of Insurance Economics (I.VW-HSG), volume 56, number 56.
    9. Braun, Alexander, 2011. "Pricing catastrophe swaps: A contingent claims approach," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 520-536.
    10. Vaugirard, Victor E., 2003. "Pricing catastrophe bonds by an arbitrage approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 119-132.
    11. Chang, Carolyn W. & Chang, Jack S.K. & Lu, WeLi, 2010. "Pricing catastrophe options with stochastic claim arrival intensity in claim time," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 24-32, January.
    12. Bauer, Daniel & Zanjani, George, 2021. "Economic capital and RAROC in a dynamic model," Journal of Banking & Finance, Elsevier, vol. 125(C).

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