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DISCUSSION PAPER PI-0805

Risk and Valuation of Mortality Contingent Catastrophe Bonds

Daniel Bauer and Florian W. Kramer

Catastrophe Mortality Bonds are a recent capital market innovation providing insurers
and reinsurers with the possibility to transfer catastrophe mortality risk off their balance
sheets to capital markets. This article introduces a time-continuous model for analyzing
and pricing catastrophe mortality contingent claims based on stochastic modeling of the
force of mortality. In addition, we give a concise survey of past transactions and explain
in detail the structure of the deals and the securities. Parametrizations of the proposed
model based on three different calibration procedures are derived. The resulting loss
profiles and prices are compared to loss profiles provided by the issuers and to market
prices, respectively. We find that the profiles are subject to great uncertainties and should
hence be considered with care by investors and rating agencies. Furthermore, by comparing
outcomes of risk-adjusted parametrizations based on insurance quotes and parametrizations
implied by market prices, we are able to give a possible explanation for the relatively fast
growth of the market for Catastrophe Mortality Bonds over the last years.

Keywords: Insurance Securitization, Catastrophe Bonds, Stochastic Mortality Modeling