Multiple-Trigger Catastrophe Bond Pricing Model and Its Simulation Using Numerical Methods

Abstract

Investor interest in single-trigger catastrophe bonds (STCB) has the potential to decline in the future. It is triggered by the increasing trend of global catastrophe loss and intensity every year, which increases the probability that a claim of STCB will occur. To increase investor interest again, the issuance of multiple-trigger catastrophe bonds (MTCB) can be one solution. However, to issue MTCB, its pricing is more complex because it involves more factors than STCB. Therefore, this study aims to design a simple MTCB pricing model. The claim trigger indices used are actual loss and fatality. Then, a nonhomogeneous compound Poisson process is used to model actual losses and fatalities aggregate to consider catastrophe intensity. In addition, this study proposes numerical methods, namely the continuous distribution approximation method and the Nuel recursive method, to facilitate the application of the model. Finally, an analysis of the effect of catastrophe intensity and other factors on MTCB prices is also presented. This study is expected to help special-purpose vehicles as MTCB issuers in MTCB pricing.