Journal
GENEVA PAPERS ON RISK AND INSURANCE-ISSUES AND PRACTICE
Volume 48, Issue 3, Pages 687-713Publisher
PALGRAVE MACMILLAN LTD
DOI: 10.1057/s41288-023-00299-5
Keywords
Pandemic cat bond; Business interruption losses; Securitisation; Re; insurance
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The aim of this paper is to demonstrate the effectiveness of cat bonds as a pandemic business interruption protection in a comprehensive public-private coverage scheme. It proposes a numerical model to show how cat bonds can complement standard re/insurance by improving coverage even in a pandemic. The paper also introduces double trigger pandemic business interruption cat bonds and discusses their characteristics. It simulates the life of theoretical PBI bonds in the restaurant industry in France using COVID-19 data.
The aim of this paper is to show how qualified investors in cat bonds can offer adequate pandemic business interruption protection in a comprehensive public-private coverage scheme. First, we propose a numerical model to expose how cat bonds can contribute to complement standard re/insurance by improving coverage of cedents even though risks are positively correlated during a pandemic. Second, we introduce double trigger pandemic business interruption cat bonds, which we name PBI bonds, and discuss their precise characteristics to provide efficient coverage. A first trigger should be pulled when the World Health Organization declares a Public Health Emergency of International Concern (PHEIC). The second trigger determines the payout of the bond based on the modelised business interruption losses of an industry in a country. We discuss moral hazard, basis risk, correlation and liquidity issues which are critical in the context of a pandemic. Third, we simulate the life of theoretical PBI bonds in the restaurant industry in France by using data gathered during the COVID-19 pandemic.
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