Sebastian Pokutta, Coca-Cola Assistant Professor in ISyE, along with Nadine Gatzert, Professor for Insurance Economics and Risk Management at the University of Erlangen-Nuremberg, and her Ph.D. student, Nikolai Vogl, received the 2014 SCOR/EGRIE Young Economist Best Paper Award at the 41st Annual Seminar of the European Group of Risk and Insurance Economists (ERGIE) for their paper Convergence of Capital and Insurance Markets: Consistent Pricing of Index-Linked Catastrophic Loss Instruments.
EGRIE is a European based non-profit organization dedicated to promoting research on risk and insurance. This is mainly achieved through the organization of scientific conferences and meetings, the publication of research materials and the creation of a contact network amongst the concerned parties.
The paper discusses how catastrophic loss instruments are financial products that protect investors from loss arising from catastrophic events, such as hurricanes and floods. Often the actual payoff of such insurance-like instruments is linked to an index that represents the damage from a catastrophic event. Linking those instruments to an index rather than the actual damage of a specific entity makes them broadly tradable as contracts can be standardized in comparison to classical insurance products. The main challenge arises from determining a fair price for these contracts. Classical approaches followed actuarial approaches that are common for insurance products, however these prices are not necessarily arbitrage free. In contrast, the presented approach gives an indication how arbitrage-free and market-consistent prices for such instruments can be derived by overcoming the crucial point of tradability of the underlying processes, improving transparency and more efficient risk management decisions.
Industrial and Systems Engineering