Loss modeling for pricing catastrophic bonds.

751990355Final report.PDFTech ReportSWUTC/08/167172-110727StructuresEarthquake resistant structuresEarthquake engineeringEarthquake resistant designEconomic impactsMathematical analysisMathematical modelsBondsRisk managementInsuranceTexasTexas Transportation InstituteDamnjanovic, IvanMander, John B.Sircar, JyotirmoyTexas Transportation InstituteSouthwest Region University Transportation Center (U.S.)NTL-ENERGY AND ENVIRONMENT-Environment ImpactsNTL-ECONOMICS AND FINANCE-Economic ImpactsNTL-REFERENCES AND DIRECTORIES-StatisticsUS Transportation CollectionIn the research, a loss estimation framework is presented that directly relates seismichazard to seismic response to damage and hence to losses. A Performance-Based EarthquakeEngineering (PBEE) approach towards assessing the seismic vulnerability of structures relatingan intensity measure (IM) to its associated engineering demand parameter (EDP) is used todefine the demand model. An empirically calibrated tripartite loss model in the form of a powercurve with upper and lower cut-offs is developed and used in conjunction with the previouslydefined demand model in order to estimate loss ratios. The loss model is calibrated and validatedfor different types of bridges and buildings. Loss ratios for various damage states take intoaccount epistemic uncertainty as well as an effect for price surge following a major hazardousevent. The loss model is then transformed to provide a composite seismic hazard-lossrelationship which is used to estimate financial losses from expected structural losses.The seismic hazard-loss model is then used to assess the expected spread, that is theinterest rate deviation above the risk-free (prime) rate in order to price two types of CAT bonds:indemnity CAT bonds and parametric CAT bonds