Impact of capacity level on reinsurance and cat bonds

Abstract

Sigorta sirketleri icin risk yonetiminin en onemli unsurlarindan biri reasuranstir. Reasurans riskin bir kismini ya da hepsini sigorta sirketinden reasurore devreder. Bu risk yonetimi icin efektif bir yontemdir; ancak reasuransin da hasar odemesi yaparken yetersiz kaldigi durumlar vardir. Bu durumlardan biri dogal bir afetin meydana gelmesidir. Herhangi bir dogal afet meydana geldiginde, bircok sigortali ayni anda hasara maruz kalir ve bu durum market kapasitesinde azalmaya yol acar. Reasurans market kapasitesi azaldikca piyalasarda daha az kaynak kullanilabilir hale gelir ve reasurans pahalilasir. Bu problemle basa cikabilmek icin klasik reasuransin yaninda katastrof senetleri gibi yeni guvenceler piyasaya suruldu. Gelecek yillarin market kapasitesi yaklasik olarak tahmin edilebilirse, sirketlerin hangi zamanda katastrof senetlerini portfoylerine katmalari gerektiigine karar vermeleri kolaylasir. Kapasiteyi tahmin eden bir model kurabilmek icin, kapasitenin kendisini etkileyen diger piyasa degiskenlerinin kendi aralarindaki ve kapasiteyle olan iliskileri incelendi. Bu calismada, hangi zamanda katastrof seneti satin almanin mantikli oldugunu belirlemek icin degiskenler arasindaki bu iliskiler incelenerek ve bunlardan yararlanilarak reasurans kapasitesini tahmin edebilmek icin bir algoritma kuruldu. Ayrica, algoritmayla bir kiyas olusturabilmek icin, son 10 yilin kapasite verisi kullanilarak bir AR(1) modellemesi yapildi. Katastrof senetleri icin yapilan calisma, Lane modelindeki yuk hesaplarini kullanarak katastrof senetleri icin bir yuk elde ederek reasurans ile kiyaslamayi hedeflemektedir.

For insurance companies, one of the most essential parts of risk management is reinsurance, which transfers some part of the risk to the reinsurer. This is an e ective way of managing risks; however there are situations where reinsurance is insu cient, such as the occurrence of a natural hazard. When a natural hazard occurs, many insureds experience loss at the sametime, which drains the reinsurance market capacity. As market capacity diminishes, tradi- tional reinsurance becomes more expensive, since less resource is available to the companies. To cope with this problem, additional securities such as cat bonds have been introduced to the (re)insurance market. If future market capacity could be forecasted, then it would be easier for companies to decide when to include cat bonds or any other additional securities in their portfolio. In order to establish a model for market capacity, it?s relationship with other market parameters and the association among parameters are examined. In this study, these relation- ships are analysed and used to establish an algorithm for predicting the next years reinsurance capacity. Moreover, last 10-year data for market capacity is used to establish an AR(1) model, in order to create a comparison with the algorithm. A case study of cat bonds is done, which uses the pricing load calculation of the Lane model and aims to ease the decision-making process by comparing the loads of cat bond and reinsurance pricing.