Valuation of insurers' contingent capital with counterparty risk and price endogeneity

Chien-Ling Lo, Jin-Ping Lee, Min-Teh Yu

Research output: Contribution to journalArticle

16 Scopus citations

Abstract

This study develops a structural framework to value insurers' contingent capital with counterparty risk (CR) and overcomes the problem of price endogeneity (PE) in the valuation model. Our results on the focal contingent capital instrument - catastrophe equity put option (CatEPut) - indicate that prices can be significantly overestimated without considering CR and be significantly underestimated without considering PE. This study also examines how CatEPuts affect the buyer's probability of default (PD). Our results show that buying a CatEPut lowers the PD for high-risk insurers, but not necessarily so for low-risk insurers; however, without taking CR and PE into account, one may significantly overestimate the credit enhancement provided by the CatEPuts. (C) 2013 Elsevier B.V. All rights reserved.
Original languageEnglish
Article numberSI
Pages (from-to)5025-5035
Number of pages11
JournalJournal of Banking and Finance
Volume37
Issue numberSI
DOIs
StatePublished - Dec 2013

Keywords

  • Contingent capital; Catastrophe risk; Insurer's default risk; Catastrophe equity puts; Contingent claim analysis

Fingerprint Dive into the research topics of 'Valuation of insurers' contingent capital with counterparty risk and price endogeneity'. Together they form a unique fingerprint.

  • Cite this