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Keywords: Building
Tan Chee Keong, Willie
2008/2009 Bu
Issue Date: 20-Oct-2009
Citation: JIANG PINGPING (2009-10-20T06:39:05Z). CATASTROPHE BONDS : PRICING AND RISKS. ScholarBank@NUS Repository.
Abstract: The rising number of natural disasters causes the economic losses to increase dramatically in the last decade. Thus, sponsors are actively seeking protections against catastrophic risk such as earthquakes and hurricanes and at the same time trying to raise capital for their disaster-prone projects. However, investors are reluctant to invest in such investments. This study proposes the use of catastrophe bonds in disaster management programmes. By offering a higher return rate, catastrophe bonds attract the investors to invest in catastrophe-prone investment. This as well provides protections to the sponsors against large economic losses. Three objectives have been set out in this study, namely to explore the structure of catastrophe bonds, to determine the various risks involved in catastrophe bonds and to propose a cat bond with modified structure for the Chinese market. Based on past literature reviews, the structure of a catastrophe bond is found to be similar to that of a reinsurance contract, except that the SPV is employed to act as the reinsurer to the sponsors, as well as the issuer and manager of the catastrophe bond. The result also shows that the risks involved in catastrophe bond transactions include the catastrophic risk, interest risk, interest-rate risk, inflation risk, currency risk, default risk, moral hazard, tail risk, basis risk and reinvestment risk. A case study on the use of the catastrophe bond in the Taiwan earthquake management programme is carried out. The analysis on the structure of the bond shows that the catastrophe risk, interest-rate risk, inflation risk and currency risk can affect the structure of the bond, especially in the tenor, coupon rate and pricing of the catastrophe bond. Along with the case study and the Chinese government reports, a set of recommendations is proposed to improve the current Chinese insurance market. Suggestions on the structure of the catastrophe bond to be issued in China are as well proposed.
Appears in Collections:Bachelor's Theses

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