Catastrophe risk, reinsurance and securitized risk-transfer solutions: a review

Abstract

PurposeCatastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.Design/methodology/approachThis research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.FindingsThe authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.Originality/valueThis research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.

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“…The observed resemblance between pandemic mortality risk and natural catastrophe risk suggests a parallel in their nature, indicating that risk management tools designed for catastrophe risk, such as catastrophe equity put options, can be suitably borrowed and adapted for mitigating extreme mortality risk in the insurance context. We refer the interested reader to Zhao et al (2021) for a detailed review of catastrophe risk management.…”

Ecologically Responsible Entrepreneurship and Its Contribution to the Green Economy’s Sustainable Development: Financial Risk Management Prospects

“…Unlike (Chiang 2021;Hagspiel et al 2021;Mezghani et al 2021;Nagy et al 2021;Yang et al 2021;Zhao et al 2021), it is shown that the financial risks of the green economy is the reduction of its contribution to sustainable development under the impact of the decrease in financing. Unlike (Ruiz 2020;Ruiz and Stupariu 2021), it is demonstrated that the COVID-19 pandemic and crisis led to the reduction of green trade and green employment-as a result of the decrease in government financing.…”

“…The essence of financial risks consist of the reduction in financing of the green economy (Chiang 2021;Hagspiel et al 2021;Mezghani et al 2021;Nagy et al 2021;Yang et al 2021;Zhao et al 2021). Accordingly, the approach to financial risk management implies an increase in green economy financing (Arcese et al 2020;Baggio and Valeri 2020;Elmo et al 2020;Essaber et al 2021;Mensi et al 2022;Valeri 2021).…”

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“…A negative but insignificant relationship was found between perceived risk and intention. Zhao et al (2021) showed that reinsurance with tools offers a combination of securities solutions for risk management. Investigating the role of the Internet of Things (IoT) technology, Liu et al (2022) show that IoT-based technologies have a positive impact on the insurer's decision-making process-risk assessment and pricing, business process performance-claim accuracy and efficiency, and the role of an IoT system's functionalities in improving drivers' attitude and behaviours.…”