Exam 2

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  • ILS
    • Weather Derivatives
      • Cooling Degree Days (CDD): measure of how hot the temperature was on a given day or during a period of days above 65 degrees Farenheit
    • Secondary Perils
      • Hail, Tornadoes, Wildfire etc. Usually perils outside of hurricanes, earthquakes and major floods.
      • Modelling is not as accurate as hurricane or earthquakes.
      • Spreads are wider for secondary peril bonds because of higher uncertainty around modelling
      • Will cost the sponsor more to include secondary perils
      • Investors don't like secondary perils (at the time of writing...)
    • Why do we use modelling?
      • Estimate a future loss based on historical events.
      • To get a climate adjusted view of risk using Warm Sea Surface Temperature (WSST)
        • Stochastic
          • Having a random probability distribution or pattern that may be analysed statistically but may not be predicted precisely
        • Poisson distrubution
          • The probability of a known event occurring in an unknown time frame
      • Exceedance Probability (EP) curves are used to show what is the % chance a loss exceeds a certain threshold
        • Y axis = % change of loss. X Axis $ loss
          • A category 5 hurricane or magnitude 9.0 earthquake would be in the bottom right hand corner in this example
    • When you invest in a ca bond when the sponsor issues it this is the primary market
      • If you buy a cat bond after it has been issued, i.e., during the life of the bond, this is a secondary market transaction
    • Non-US cat bonds demand a lower coupon because they diversify away from US peak perils
    • Industry Loss Warranty
      • Pay out is dependent on losses to the entire insurance industry rather than the sponsors actual incurred loss
    • Collateralised Reinsurance
      • Similar structure to a catastrophe bond in that deals are fully collateralised
        • Collateralisation is either fully cash payment or a letter of credit
    • Basis Risk
      • The difference between a modelled expected payout and the actual losses incurred
        • High basis risk for index and parametric deals
          • Low basis risk for indemnity deals as losses closely mirror sponsors losses
  • ESG
    • Environmental, Social and Corporate Governance
  • Cat bonds are traded over-the-counter (OTC) meaning they are transacted through brokers rather than on a standardised exchange
  • Ex-Ante = Acting before the event happens
    • Ex-Post = Acting after the event happens
  • Proportional reinsurance comprises of quota-share, i.e., we take a 50:50 share of the risk. The share can be customised to whatever you like
  • Non-proportional: also know as Excess of Loss (XOL). I take losses above a certain level
    • I.e., $10m in excess of $20m
  • Coupon = interest rate given to investors for accepting risk
    • Expected Loss: driven by stochastic simulations of a catalogue of past events
      • Major modelling agencies include AIR, RMS and Corelogic


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