The effectiveness of asset, liability and equity hedging against catastrophe risk

What is it about?

The winter storms in North America and Europe are responsible for the majority of the insured natural catastrophe losses. This study analyzes the effectiveness of insurers hedging against the winter storm risk in terms of asset (catastrophe derivatives), liability (catastrophe bonds) and equity (catastrophe equity puts) risk management perspectives. The analysis results of the various financial performances show that our suggested hedging strategies are effective based on the long-term positive profit and the improvement in the insolvency ratios. The conclusions of this study provide the insurers with less volatile premiums and more diversified portfolios under catastrophe risk management.

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Why is it important?

The main purpose of the study is to help insurance companies reduce the default risk and bankruptcy risk resulting from catastrophic natural disasters, make more insurance companies survive these catastrophic events, and thus reduce the tremendous costs to society and the economy, by using asset, liability and equity hedging strategies.

Perspectives