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Explore the dispersion of catastrophe bonds catastrophe risk

Author: GaoWei From: www.yourpaper.net Posted: 2009-03-31 08:24:37 Read:
Abstract: The growth of the national economy, the rapid growth of the insurance value of the increase of population density and unit area, and increase the probability of occurrence of catastrophe risk. Major earthquake in Wenchuan '5 12 "gave Sichuan and other provinces causing huge loss of life and property. Unfortunately, most life insurance companies are not caused by earthquake insurance accident included in the" exclusion clause ", but the earthquake was exclude home property insurance compensation, because the CIRC unified regulations in the country as a specific natural phenomenon, earthquake do except responsibility to deal with the property damage caused by the earthquake, the insurance company will not claim to China's insurance system is a challenge, but also caused the number of people questioned how then we should disperse and transfer catastrophe risk? how to enhance the insurer's risk tolerance? author believes that we should learn from international experience, explore catastrophe bonds, dispersed giant disaster risk.
Keywords: catastrophe bonds, catastrophe risk, risk securitization, agricultural options, catastrophe risk index, credit rating, the stock market

The growth of the national economy, the rapid growth of the insurance value of the increase of population density and unit area, increase the probability of occurrence of catastrophe risk. Major earthquake in Wenchuan '5 12 "gave Sichuan and other provinces causing huge loss of life and property. Unfortunately, most life insurance companies are not caused by earthquake insurance accident included in the" exclusion clause ", but the earthquake was exclude home property insurance compensation, because the CIRC unified regulations in the country as a specific natural phenomenon, earthquake do except responsibility to deal with the property damage caused by the earthquake, the insurance company will not claim to China's insurance The system is a challenge, but also caused a number of people questioned.

So, how do we should disperse and transfer catastrophe risk? How to strengthen the insurer's risk tolerance? The international community is not a good experience for us to learn and learn from it? I believe that we should learn from international experience, explore catastrophe bonds, diversify catastrophe risk.

Catastrophe bonds is the most important form of securitization of catastrophe risk. Catastrophe risk securitization is a catastrophe risk transfer to the capital markets, insurance derivatives, catastrophe risk securitization deal with a catastrophe risk financing from the capital market to raise funds to resolve. From simple to complex, catastrophe risk securitization can be roughly divided into the catastrophe bonds, catastrophe futures, catastrophe options and catastrophe swap. The development of China's futures market lag repeatedly dystocia, stock index futures, options of agricultural products is still in the research stage, so I think now investigate the catastrophe futures, catastrophe options and catastrophe swaps, it is too early. Exploration of catastrophe risk securitization, is likely to start from the simple catastrophe bonds.

Catastrophe bonds (Catastrophe Bonds) is a special kind of company bonds its direct participants include: catastrophe bond issuers Special Purpose Vehicle, referred to the SPV , reinsurance companies, investors and trusts. Its operating mechanism is:

SPV and reinsurance companies have signed a contract of reinsurance, catastrophe risk reinsurance companies and reinsurance premiums is received, the development of catastrophe bond products, including the agreed time period, to the detriment of the event and bond interest rates; SPV issued to investors through the stock market Catastrophe bonds; investors to buy catastrophe bonds, SPV the proceeds deposited in a trust; when in SPV deposited funds, trusts, major investment in bonds and other low-risk products.

Within the agreed period, if it has not occurred to the detriment of events, SPV will be credited to the trust funds to recover investors pay bond interest rates in accordance with the agreed investment income, while the termination of the transaction. Within the agreed time period, to the detriment of events, SPV will recover the funds deposited into the trust agencies provide to the reinsurance company, used as part of the compensation of the insured. Compensation is completed, SPV remaining funds to reimburse the catastrophe bond investors.

To the detriment of the incident, the issuer is the reinsurance company can waive or even waive all principal and interest deferred payment of a portion of the bonds. This means that when serious loss caused by events, investors may not get any interest, and may even lose some or all of the principal. As a compensation for risk, the catastrophe bond yields than ordinary bonds, generally based on in the London Interbank Offered Rate (LIBOR), plus a risk spreads. Risk spreads due to the conditions of the bond issuance and bond credit rating varies, generally between 2% to 3%. So, catastrophe bonds average yield is relatively high, generally at about 7%.

For example, the U.S. insurance company (USAA) worth $ 477 million catastrophe bond issued in 1977. According to the results of the risk assessment, if the July 15, 1997 to 31 December 1997 between the U.S. East Coast hurricane, causing economic losses will be $ 1,000,000,000, as a breach of the standard, USAA catastrophe bond interest rates is divided into two: First, LIBOR plus 2.82 percentage points, if the losses exceed the standards of default, investors would lose all interest, but you can get the entire principal capital guarantee; LIBOR plus 5.75 percentage points, If the loss exceeds the standards of default, investors would lose all interest and principal, which is the principal risk. USAA subsidiary called Residential Re SPV These funds invest in low-risk U.S. Treasury bonds, at the same time it signed a reinsurance contract with the insurance company. If the risk of contract does not occur, then the premium is used to pay the interest on the bonds; reinsurance premiums and bonds to raise part of the funds with as reinsurance compensation if the risk occurs.

With the securities market issued catastrophe bonds, and can enhance the solvency of reinsurers and reinsurance. Currently, the United States issued the largest catastrophe risk. In 2000, the world's largest reinsurance companies - Germany's Munich Re insurance companies as issuers of catastrophe risk to enter the capital market to issue $ 300 million in catastrophe bonds, effectively reducing its U.S. hurricane, California earthquake Europe, snowstorms and other catastrophe risks.

Of course, the issue of catastrophe bonds is a very complex task, need to do a lot of basic work, estimates the probability of catastrophic loss, such as building catastrophe risk index; credit rating agencies; the design catastrophe bonds deadline structure and trigger mechanism ; strengthen professional research, nurturing professional teams; In addition, catastrophe bonds links with insurance and securities markets, catastrophe bonds issued process, in fact, is the process of dispersion and transfer the risk of the insurance market to the securities market, which requires the full development of the securities market and has a very strong risk tolerance, but also a number of risk preferences. China's financial sector is a separate operation, separate supervision, catastrophe bonds issued in the domestic and legal obstacles, such as of SPV legal status and tax incentives. So I believe that explore catastrophe bonds should adhere to the principle of gradual and orderly progress in China, could be considered the first Chinese and then Group led the insurance companies to participate in the establishment of the SPV in Bermuda or the Cayman Islands and other free economic zones, global issuance of catastrophe bonds. This can be achieved not only domestic catastrophe risk to the global dispersion legitimate tax avoidance, to simplify the procedures for the issuance and convenient investment. Catastrophe bonds retained loss to be as high as possible, the initial capital guarantee type can be selected, do not let investors feel that the risk is too large, otherwise it will be difficult to attract investors.
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