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Research on Flood Risk Securitization in China

Author: LanGuiRong
Tutor: LiHengZuo
School: Southwestern University of Finance and Economics
Course: Insurance
Keywords: Catastrophe risk Catastrophe risk bond Flood insurance Pareto distribution Flood bond
CLC: X43
Type: Master's thesis
Year: 2011
Downloads: 129
Quote: 0
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Abstract

Our country is a country where many natural disasters happen frequently.The common disasters include earthquakes, snow disasters, tornadoes, floods and so on. These disasters will often cause many people injured or died and homeless. And they also cause heavy economical lose and may even affect the stable development of our national economy. For the purpose of voiding such risks, the need of insuring huge disasters is also urgent in our country. Meanwhile, there is a big vacancy in insuring huge disasters in the market.However, insuring the huge disasters began very late in insurance area. And the insurance types are limited. Many huge disasters are in the uninsurable state. At present, our country relieves the disasters by government finance, social helping, and international helping and so on. There is no huge disaster insuring system existing. The flood in 1998 makes our people realize the importance of flood disasters. The earthquake of 2008 alerted people, so that our people begin to realize the importance of huge disasters insuring. Therefore, there is very important theory and reality significance to the research for the huge disasters insuring.The loss locations of the earthquake, flood and typhoon are very similar. In another word, the huge disaster often causes the same or similar risk carriers in a wide range. In that case, every incident often causes many insurants claim to the insurers for the compensation at the same time. That’s what’s called collective risks. Because of the collective risks, when the huge disasters happen, many individuals in the same area will appear. So it will not meet the need of the independency of the individual lose allocation to each other. The real lose compensation will be allocated in deformed trait. And it’s obviously of right tendency.As we know, Pareto distribution has the trait of obviously right tendency. Based on the experience of predecessors, this paper uses Pareto distribution to analyze the risk and lose allocation and provides solid examples.This paper includes five parts; the exact research is as follows,The first part includes the first chapter and foreword. This chapter lays out this paper, and illustrates the background and the significance of the topic, an overview of huge disaster and risk research documents, which is about huge disaster risk theory research, huge disaster insuring securitization research and the overview of huge disaster bond price setting research documents, researching method and creative points.The second part includes 2nd chapter, chapter 2 illustrates the definition, characteristics of catastrophe risk, the classification and the catastrophe risk status in China. Catastrophe risk has not standard definition currently; China should according to the particular national conditions in different historical periods of catastrophe insurance to define the Catastrophe risk.Our current catastrophe risk status has four main features:many disaster species, wide distribution, high frequency, causing heavy loss. Our country has mainly Catastrophe risk like floods, earthquakes, typhoons, drought, etc.The third part includes chapter 3,which summarizes the design of catastrophe bonds, from the participation body, design principles, transaction process and the issue of processing of catastrophe bonds; Then makes binary tree actuarial analysis from the catastrophe bonds pricing mechanism discounter-cash-flow law; Finally make a simple comparison analysis about catastrophe bonds and reinsurance, we consider, the catastrophe bonds are more applicable facing catastrophe risk, but with the normal risk, reinsurance is more practical, so reinsurance won’t withdraw from the stage of history because of the rise of catastrophe insurance securitization, they complement each other, inter-permeation, compose catastrophe risk prevention system.The 4th and 5th chapters are the fourth part of the article, The chapter 4 has analyzed flood insurance from the angle of economics- the supply and demand, the author points out that the demand influence factor of the flood insurance as follows: the perception of risk, the hazard-affected experience, the strategy of flood control and disaster alleviation by the government, the characteristics of hazard-affected body, the social and economic characteristics of the individual and the actual risk of the local; the supply influence factor:the support of the policy of the government, information asymmetry, adverse selection and operating cost of the flood insurance; the last we made analysis from the necessity and the feasibility of the flood insurance bond. Chapter 5 makes empirical analysis with random simulation method on flood loss distribution, and then makes simple design from the angle of flood bond.The fifth part includes chapter 6 on summary, this paper expounds the problems facing the catastrophe securitization and give some suggestions on the problems.This paper adopts research methods as follows:1. Data studies and method of induction2. Empirical method and normative analysis method,3. Data analysis and comparison analysis method,The innovation of this paper lies in:as liking (2009) has adopted Pareto distribution fitting China flood loss distribution and confirmed its rationality, using Pareto distribution to analyze the risk by flooding, we generated random data by the methods of random simulation, and then makes empirical analysis using random data, exploring the simple pricing in flood bonds.

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CLC: > Environmental science, safety science > Disasters and their prevention > Natural disasters and their prevention
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