Loss modeling for pricing catastrophic bonds.
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2008-12-01
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Edition:Final report.
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Abstract:In the research, a loss estimation framework is presented that directly relates seismic
hazard to seismic response to damage and hence to losses. A Performance-Based Earthquake
Engineering (PBEE) approach towards assessing the seismic vulnerability of structures relating
an intensity measure (IM) to its associated engineering demand parameter (EDP) is used to
define the demand model. An empirically calibrated tripartite loss model in the form of a power
curve with upper and lower cut-offs is developed and used in conjunction with the previously
defined demand model in order to estimate loss ratios. The loss model is calibrated and validated
for different types of bridges and buildings. Loss ratios for various damage states take into
account epistemic uncertainty as well as an effect for price surge following a major hazardous
event. The loss model is then transformed to provide a composite seismic hazard-loss
relationship which is used to estimate financial losses from expected structural losses.
The seismic hazard-loss model is then used to assess the expected spread, that is the
interest rate deviation above the risk-free (prime) rate in order to price two types of CAT bonds:
indemnity CAT bonds and parametric CAT bonds.
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