Design and valuation of multi-region CoCoCat bonds

TL;DR

This paper presents a new multidimensional CoCoCat bond linked to natural catastrophes across regions, modeling complex dependencies and deriving pricing formulas, with real data demonstrating the impact of regional correlations.

Contribution

It introduces a novel multi-region CoCoCat bond model that explicitly accounts for inter-regional catastrophe dependencies and provides tailored risk-neutral pricing formulas.

Findings

Regional dependencies significantly affect bond pricing.

Model fitted to real catastrophe data shows dependency impact.

Different dependence scenarios alter risk assessments.

Abstract

This paper introduces a novel multidimensional insurance-linked instrument: a contingent convertible bond (CoCoCat bond) whose conversion trigger is activated by predefined natural catastrophes across multiple geographical regions. We develop such a model explicitly accounting for the complex dependencies between regional catastrophe losses. Specifically, we explore scenarios ranging from complete independence to proportional loss dependencies, both with fixed and random loss amounts. Utilizing change-of-measure techniques, we derive risk-neutral pricing formulas tailored to these diverse dependence structures. By fitting our model to real-world natural catastrophe data from Property Claim Services, we demonstrate the significant impact of inter-regional dependencies on the CoCoCat bond's pricing, highlighting the importance of multidimensional risk assessment for this innovative financial instrument.