Title: Rationale and mechanics for peak natural catastrophe variance swaps in insurance

Authors: Ivelin M. Zvezdov; Sebastian Rath

Addresses: AIR Worldwide, VERISK Analytics Corp., 131 Dartmouth Street, Boston 02116, MA, USA ' NN International, NN Group, Schenkkade 65, 2595 AS Den Haag, The Netherlands

Abstract: The geospatial variability, clustering and dependence of natural catastrophe loss for (re)insured risks are well-known physical realities for insurance industry practitioners and academics. These realities create complex underlying risks for (re)insurance policy underwriting, capital reserving and portfolio management, all of which are reasonably hard to measure and difficult to quantify. The quantitative measurements of such underlying risk factors are also known as second order risks. They are traditionally evaluated and hedged using statistical models for variance and volatility and involve specific complexities in modelling and managing both, volatility and correlation. This technical study explores the motivation, structuring and detailed mechanics for using what we call a 'peak natural catastrophe risk variance swap contract' adapted to provide reinsurance cover for a property and business interruption insurance portfolio. We use known natural catastrophe event historical and modelled loss data to structure, price and test the sensitivities of the swap contract.

Keywords: peak risk variance swap; geo-spatial natural catastrophe risk; insurance risk transfer.

DOI: 10.1504/IJBD.2018.097406

International Journal of Bonds and Derivatives, 2018 Vol.4 No.1, pp.33 - 51

Received: 08 Nov 2017
Accepted: 26 Apr 2018
Published online: 21 Jan 2019 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article