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Securitization of pandemic risk by using coronabond
Adlane Haffar1, Éric Le Fur2, Mohamed Khordj3
1Faculty of Mathematics (USTHB), MSTD Laboratory, University of Science and Technology Houari Boumédiène, Postbox 32, Bab Ezzouar, 16111 Algiers, Algeria.
Financial Markets and Portfolio Management
|June 26, 2023
Summary
Insurance securitization can cover pandemic risks in the EU by transferring health risks to financial markets. This strategy, using extreme value theory, shows financial markets react to pandemic shocks, enabling corona bond triggering.
Area of Science:
- Financial Economics
- Risk Management
- Insurance Studies
Background:
- Pandemic risk poses a significant threat to insurance markets.
- Traditional risk transfer methods may be insufficient for widespread health crises.
- The COVID-19 pandemic highlighted the need for innovative risk management strategies.
Purpose of the Study:
- To investigate pandemic risk coverage in EU member states via insurance securitization.
- To analyze the financial market's reaction to pandemic shocks.
- To assess the viability of insurance securitization as an alternative to traditional reinsurance.
Main Methods:
- Application of Extreme Value Theory (EVT) to identify trigger thresholds.
- Analysis of financial market data from January 24, 2020, to March 31, 2020.
- Examination of stock market index fluctuations and return rates.
Main Results:
- Financial markets exhibit an immediate but short-lived reaction to pandemic shocks.
- Stock market index volatility was moderate, yet sufficient for triggering corona bonds with optimal thresholds.
- Insurance securitization is presented as a viable alternative to co-insurance and reinsurance.
Conclusions:
- Insurance securitization offers a potential mechanism for managing pandemic-related financial losses.
- Optimal threshold setting is critical for the effectiveness of corona bonds.
- Establishing a dedicated reinsurance pool is essential for successful pandemic risk securitization.
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