Valuación actuarial de bonos catastróficos para desastres naturales en México

Abstract

Floods, hurricanes and earthquakes occur every year in Mexico. These natural phenomena can be considered as catastrophes if they produce large economic damages in the affected areas. In these cases it is required a huge amount of money to provide relief to the catastrophe victims and areas. Usually, in Mexico it is the local and/or federal governments that are responsible to provide these funds. The main objective of this article is to develop an actuarial methodology for the pricing of CAT bonds in Mexico in order to allow the government to have additional funds to provide relief to the affected victims and areas in case that the catastrophic event occurs during the CAT bond period. If the catastrophic event does not occur during the CAT bond period then the CAT bondholders will get a higher interest rate than the (risk-free) reference interest rate in the market. To make the CAT bond more attractive to investors, the CAT bonds considered in this work have the additional characteristic that the CAT bondholders do not necessarily lose all their initial investment if the catastrophic event occurs. Instead, a percentage of the CAT bond principal is lost or their initial investment is paid in a date after the end of the CAT bond period.