Essay About Real Estatefaculty Of Business Administrationlaval University And Flood Losses

Hedging Flood Losses Using Cat Bonds
Hedging flood losses in Quebec using Cat-BondsAlexandre TêtuDepartment of Finance, Insurance and Real EstateFaculty of Business AdministrationLaval University, Quebec, CanadaEmail: [email protected] Son LaiDepartment of Finance, Insurance and Real EstateFaculty of Business AdministrationLaval University, Quebec, CanadaEmail: [email protected] Issouf SoumaréDepartment of Finance, Insurance and Real EstateFaculty of Business AdministrationLaval University, Quebec, CanadaEmail: [email protected] GendroDepartment of Finance, Insurance and Real EstateFaculty of Business AdministrationLaval University, Quebec, CanadaEmail: [email protected] 2012We thank the Fonds Conrad Leblanc and the Institut de Finance Mathématique of Montréal (IFM²) for their financial support. We thank Sylvain Tremblay from the Quebec Public Safety Department, Marie-Claude Beaulieu and Catherine Cournoyer. All errors and omissions are the authors’ sole responsibilities.Hedging flood losses in Quebec using Cat-Bonds

AbstractIn this paper, we develop a methodology to model the risk of losses due to a disaster in which the jump process has an upward trend and a seasonal effect. We applied this model to losses in the financial assistance program in case of flooding of the Government of Quebec. The results that we obtain when calibrating our intensity function of the non-homogeneous Poisson process confirm the presence of an upward trend in the number of events of flooding and of a seasonal cyclical effect. According to this model, we evaluate the level of hedging that would have resulted in the lowest cost to the government during the last 19 years. We show that, if they required a risk premium of 2.69 times the expected losses, the performance for the past 19 years of a Cat-Bond on the floods in Quebec would have been very interesting for investors compared to the performance of the S&P/TSX. Especially in the case of the inclusion of federal aid, Based on existing literature, we note that the time of issuance of catastrophe bonds is an important factor in the level of premium required by the market. We use levels historically observed risk premiums to provide a price range for the issuance of catastrophe bonds that would allow the Department of Public Safety to hedge its risk linked to flood losses in the coming years.