Pricing Model for Earthquake CAT Bonds

Catastrophe bond (CAT bond) is one of the most active instruments to transfer catastrophic risk into the capital market around the whole world. And the pricing theories are developed recently. For earthquake disaster, a pricing model, base on engineering seismic risk assessment, is given. The occurring probability of a defined earthquake catastrophe, estimated by seismic risk assessment method, is adopted as an input. Some factors, like yields and proportion of reinvestment, principal protected ratio, issuance fee, circulation, maturity period, claim payments of insurers and reinsurers, are designed. The cash flows of earthquake insurance premium in complete and incomplete markets are described by geometric Brownian motion and jump-diffusion processes respectively. The annual coupon rate of a CAT bond is calculated under the equilibrium between the incomes of investors and issuers. The feasibility of the model is represented by a production.