#03-18
"Actuarially Consistent Valuation of Catastrophe Derivatives"
Abstract: In this article, we investigate the valuation of insurance derivatives which facilitate the trading of insurance risks on capital markets, such as catastrophe derivatives that were traded at the Chicago Board of Trade. These instruments have to be priced relative to observed insurance premiums that are written on the same underlying risks to exclude any arbitrage opportunities. We derive a representation of those catastrophe derivative price processes that are actuarially consistent and determine several situations in which actuarial consistency leads to a complete market for catastrophe derivatives.
JEL Classification: G12, G13
Key Words: Insurance derivatives; securitization; actuarially consistent pricing; Fourier transform; incomplete markets; compound Poisson process; Lévy process.
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