Decomposition of Natural Catastrophe Risks: Insurability Using Parametric CAT Bonds

Morteza Tavanaie Marvi, Daniël Linders

Research output: Contribution to journalArticlepeer-review


Nat Cat risks are not insurable by traditional insurance mainly because of producing highly correlated losses. The source of such correlation among buildings of a region subject to a natural hazard is discussed. A decomposition method is proposed to split Nat Cat risk into idiosyncratic (and hence insurable) risk and systematic risk (carrying the correlated part). It is explained that the systematic risk can be transferred to capital markets using a set of parametric CAT bonds. Premium calculation is presented for insuring the decomposed risk. Portfolio risk-return trade-off measures for investing on the parametric CAT bond are derived. Multi-regional and multi-hazard parametric CAT bonds are introduced to reduce the risk of the investment. The methodology is applied on a region with about 3000 residential buildings subject to flood hazards.
Original languageEnglish (US)
Article number215
Issue number12
StatePublished - Dec 1 2021


  • CAT bond
  • Catastrophe risk management
  • Correlated risk
  • Insurability
  • Nat Cat risk
  • Parametric bond
  • Risk decomposition
  • Systematic risk

ASJC Scopus subject areas

  • Accounting
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management


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