Valuation of catastrophe reinsurance with catastrophe bonds

This study develops a contingent-claim framework for valuing a reinsurance contract and examines how a reinsurance company can increase the value of a reinsurance contract and reduce its default risk by issuing catastrophe (CAT) bonds. The results also show how the changes in contract values and default risk premium are related to basis risk, trigger level, catastrophe risk, interest rate risk, and the reinsurer’s capital position.