CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA

A Catastrophe Bond (CAT Bond) is a type of Insurance Linked Security (ILS) with the payment of the Principal or the Face Value to the investors at the maturity date dependent upon the occurrence or the non-occurrence of the underlying natural disaster during the period of the investment. In the cont...

Full description

Saved in:
Bibliographic Details
Main Author: ATHAR ISWANDI, MUHAMMAD
Format: Final Project
Language:Indonesia
Online Access:https://digilib.itb.ac.id/gdl/view/65447
Tags: Add Tag
No Tags, Be the first to tag this record!
Institution: Institut Teknologi Bandung
Language: Indonesia
id id-itb.:65447
spelling id-itb.:654472022-06-23T09:17:05ZCATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA ATHAR ISWANDI, MUHAMMAD Indonesia Final Project catastrophe bond, nonhomogeneous Poisson process, generalized pareto distribution, flood catastrophe insurance. INSTITUT TEKNOLOGI BANDUNG https://digilib.itb.ac.id/gdl/view/65447 A Catastrophe Bond (CAT Bond) is a type of Insurance Linked Security (ILS) with the payment of the Principal or the Face Value to the investors at the maturity date dependent upon the occurrence or the non-occurrence of the underlying natural disaster during the period of the investment. In the context of a general insurance business, a reinsurance company that covers natural disaster insurance claims uses a CAT Bond to transfer the risk of financial losses due to a natural disaster not only to a larger reinsurance company, but also to a capital market. In this Final Project, a CAT Bond modeling is carried out which is linked to a flood natural disaster in the People's Republic of China (PRC). The data on the flood events and the corresponding financial losses in PRC were taken from the Emergency Events Database (EM-DAT) for the period of January 2012 to December 2021. The data were then cleaned and 86 observations were obtained and analyzed. To model the occurrence of the flood natural disaster, a non-homogeneous Poisson process is used; and to model the corresponding financial losses, the peak-over-threshold (POT) approach is used, hence modeled by a generalized Pareto distribution. The CAT Bond modeling is carried out following a scenario in which the coupon rate is calculated as the sum of the premium and LIBOR; the maturity periods applied are 1, 3, and 5 years; and the trigger used is the indemnity trigger. Several simulations were carried out to observe: the profit received by the Issuer; the expenses by the Sponsors; and the returns received by the Investors. The issued CAT Bond succeeded in: reducing the risk of financial losses which could be suffered by the Sponsor due to a flood catastrophic event for 1, 3, and 5 year maturity periods; maintaining the Issuer to earn profits for all simulated catastrophe events; and allowing the Investors to obtain positive returns with high probabilities, although the risk of losing all of the Principal still exists. text
institution Institut Teknologi Bandung
building Institut Teknologi Bandung Library
continent Asia
country Indonesia
Indonesia
content_provider Institut Teknologi Bandung
collection Digital ITB
language Indonesia
description A Catastrophe Bond (CAT Bond) is a type of Insurance Linked Security (ILS) with the payment of the Principal or the Face Value to the investors at the maturity date dependent upon the occurrence or the non-occurrence of the underlying natural disaster during the period of the investment. In the context of a general insurance business, a reinsurance company that covers natural disaster insurance claims uses a CAT Bond to transfer the risk of financial losses due to a natural disaster not only to a larger reinsurance company, but also to a capital market. In this Final Project, a CAT Bond modeling is carried out which is linked to a flood natural disaster in the People's Republic of China (PRC). The data on the flood events and the corresponding financial losses in PRC were taken from the Emergency Events Database (EM-DAT) for the period of January 2012 to December 2021. The data were then cleaned and 86 observations were obtained and analyzed. To model the occurrence of the flood natural disaster, a non-homogeneous Poisson process is used; and to model the corresponding financial losses, the peak-over-threshold (POT) approach is used, hence modeled by a generalized Pareto distribution. The CAT Bond modeling is carried out following a scenario in which the coupon rate is calculated as the sum of the premium and LIBOR; the maturity periods applied are 1, 3, and 5 years; and the trigger used is the indemnity trigger. Several simulations were carried out to observe: the profit received by the Issuer; the expenses by the Sponsors; and the returns received by the Investors. The issued CAT Bond succeeded in: reducing the risk of financial losses which could be suffered by the Sponsor due to a flood catastrophic event for 1, 3, and 5 year maturity periods; maintaining the Issuer to earn profits for all simulated catastrophe events; and allowing the Investors to obtain positive returns with high probabilities, although the risk of losing all of the Principal still exists.
format Final Project
author ATHAR ISWANDI, MUHAMMAD
spellingShingle ATHAR ISWANDI, MUHAMMAD
CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA
author_facet ATHAR ISWANDI, MUHAMMAD
author_sort ATHAR ISWANDI, MUHAMMAD
title CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA
title_short CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA
title_full CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA
title_fullStr CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA
title_full_unstemmed CATASTROPHE BOND MODELING WITH A NONHOMOGENEOUS POISSON PROCESS AND GENERALIZED PARETO DISTRIBUTION: CASE STUDY OF FLOOD NATURAL DISASTER IN THE PEOPLE'S REPUBLIC OF CHINA
title_sort catastrophe bond modeling with a nonhomogeneous poisson process and generalized pareto distribution: case study of flood natural disaster in the people's republic of china
url https://digilib.itb.ac.id/gdl/view/65447
_version_ 1822277322255892480