Exam 2
- Created by: jesus christ
- Created on: 09-05-22 16:04
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- ILS
- Weather Derivatives
- Cooling Degree Days (CDD): measure of how hot the temperature was on a given day or during a period of days above 65 degrees Farenheit
- Secondary Perils
- Hail, Tornadoes, Wildfire etc. Usually perils outside of hurricanes, earthquakes and major floods.
- Modelling is not as accurate as hurricane or earthquakes.
- Spreads are wider for secondary peril bonds because of higher uncertainty around modelling
- Will cost the sponsor more to include secondary perils
- Investors don't like secondary perils (at the time of writing...)
- Why do we use modelling?
- Estimate a future loss based on historical events.
- To get a climate adjusted view of risk using Warm Sea Surface Temperature (WSST)
- Stochastic
- Having a random probability distribution or pattern that may be analysed statistically but may not be predicted precisely
- Poisson distrubution
- The probability of a known event occurring in an unknown time frame
- Stochastic
- Exceedance Probability (EP) curves are used to show what is the % chance a loss exceeds a certain threshold
- Y axis = % change of loss. X Axis $ loss
- A category 5 hurricane or magnitude 9.0 earthquake would be in the bottom right hand corner in this example
- Y axis = % change of loss. X Axis $ loss
- When you invest in a ca bond when the sponsor issues it this is the primary market
- If you buy a cat bond after it has been issued, i.e., during the life of the bond, this is a secondary market transaction
- Non-US cat bonds demand a lower coupon because they diversify away from US peak perils
- Industry Loss Warranty
- Pay out is dependent on losses to the entire insurance industry rather than the sponsors actual incurred loss
- Collateralised Reinsurance
- Similar structure to a catastrophe bond in that deals are fully collateralised
- Collateralisation is either fully cash payment or a letter of credit
- Similar structure to a catastrophe bond in that deals are fully collateralised
- Basis Risk
- The difference between a modelled expected payout and the actual losses incurred
- High basis risk for index and parametric deals
- Low basis risk for indemnity deals as losses closely mirror sponsors losses
- High basis risk for index and parametric deals
- The difference between a modelled expected payout and the actual losses incurred
- Weather Derivatives
- ESG
- Environmental, Social and Corporate Governance
- Cat bonds are traded over-the-counter (OTC) meaning they are transacted through brokers rather than on a standardised exchange
- Ex-Ante = Acting before the event happens
- Ex-Post = Acting after the event happens
- Proportional reinsurance comprises of quota-share, i.e., we take a 50:50 share of the risk. The share can be customised to whatever you like
- Non-proportional: also know as Excess of Loss (XOL). I take losses above a certain level
- I.e., $10m in excess of $20m
- Coupon = interest rate given to investors for accepting risk
- Expected Loss: driven by stochastic simulations of a catalogue of past events
- Major modelling agencies include AIR, RMS and Corelogic
- Expected Loss: driven by stochastic simulations of a catalogue of past events
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