Lowering premiums and increasing investor returns by issuing multi-country CAT bonds

Le résumé fourni par la source

Low- and middle-income countries often lack the means to recover from extreme hazards, leading to detrimental long-term impacts on their economy and welfare. Hence, in recent years, the World Bank has actively promoted the use of risk transfer mechanisms such as the issuance of sovereign catastrophe bonds (CAT bonds). Despite many advantages, uptake remains limited to a few countries, mainly due to high premium demands. A common solution to reduce premiums in the insurance sector is to pool the underlying risk, which could be applied to sovereign CAT bonds but is not yet done. Here, we develop an open-source framework based on the CLIMADA environment to simulate CAT bonds and assess the implications of catastrophe risk pooling in the CAT bond market. We evaluate the consequences regarding insurance expenses and investor attractiveness by creating CAT bond portfolios utilizing global risk pooling through the issuance of multi-country CAT bonds. Compared to a single-country CAT bond insurance, our constructed portfolios can provide equal coverage with competitive investor returns and up to 26% less capital requirements and premium payments. Furthermore, our results indicate that countries facing a lower disaster risk can benefit from pooling with more exposed countries, thus showing that pooling not only strengthens solidarity between countries, but also provides financial benefits to all involved members.

Ce résumé expose les affirmations des auteurs. BNTIC ne l’interprète pas comme une validation indépendante des résultats.