GNGTS 2021 - Atti del 39° Convegno Nazionale

GNGTS 2021 S essione 2.2 284 A CAT BOND-BASED COVERAGE SCHEME FOR THE ITALIAN RESIDENTIAL BUILDING STOCK L. Hofer 1 , M.A. Zanini 1 , P. Gardoni 2 1 Dipartimento di Ingegneria Civile, Edile e Ambientale, Università degli Studi di Padova, Padova, Italia 2 Department of Civil and Environmental Engineering, University of Illinois at Urbana-Champaign, Urbana, IL, USA Introduction Natural disasters are a source of major concerns worldwide since they can have devastating effects on communities, in terms of costs for repairing damaged structures and infrastructure, human losses, business interruptions, and environmental impacts. For this reason, they are relevant issues for individuals, corporations, and governments. Rainfalls, windstorms, tornadoes, floods, and earthquakes cause billion dollars losses every year (Gardoni et al. 2016). In some countries, catastrophe losses are managed by governments and public authorities. In this “welfarist” context, homeowners are not encouraged to subscribe private insurance contracts, and, biased by a low perception of risk, they are often not willing to invest in retrofit interventions. Such situations can be particularly difficult for governments. Similarly, private reinsurance companies, that usually have large portfolios, need to provide coverage to significant losses by using sophisticated Alternative Risk Transfer products (ART). One ART solution is represented by the insurance-linked securitization, an alternative way for transforming catastrophe risk into securities (i.e., catastrophe bonds) and selling them to financial entities able to absorb such high levels of losses (i.e., the financial market). CAT bonds offer a significant supply for reinsurance surpassing the capacity of traditional providers and are therefore well suited to provide coverage for substantial losses (Grossi and Kunreuther 2005). CAT bonds are usually structured as coupon- paying bonds with a default linked to the occurrence of a trigger event or events during the period of coverage. In case of default, the principal, which has been held in trust, is used to pay the losses of the issuing company; on the contrary if there is no default, the principal is returned to the investor at maturity and coupons are also paid as counterweight to the assumed risk. One key point in issuing an earthquake CAT bond, is the definition of the trigger event. A commonly used trigger event is the exceedance of a loss threshold, that is the one adopted in this study. In some other cases, different triggers can be adopted, as physically based parametric triggers. Recently, Hofer et al. 2019 proposed a risk-based CAT bond pricing procedure able to consider the propagation of parameter uncertainties on the default probability ( P f ) of a CAT bond and on the pricing, while in Hofer et al. 2020 a general methodology for addressing the design of a CAT bond-based coverage for a spatially distributed portfolio is proposed. This paper aims to present the results of Hofer et al. 2020b in which a CAT bond-based coverage scheme against losses induced by seismic events all over the entire national boarders was priced for the residential building stock in Italy. Further details can be found in Hofer et al. 2020. Framework As discussed in Hofer et al. 2020, the design of a suitable coverage for a distributed portfolio can be subdivided in four main steps. The proposed procedure can be used for different purposes by issuing companies, considering also different kinds of natural or man-made hazards. 1. Target losses definition : the first step deals with the identification of the spatially distributed portfolio that the issuing company wants to cover. Commonly, national governments may be interested in covering the entire national territory, while private insurance or reinsurance companies may want to protect their entire insured portfolio,