Developing a Cat-bond coverage scheme against seismic risk for the Italian residential buildings

Natural and man-made disasters are source of significant concern for privates and public authorities worldwide since they commonly imply relevant costs for repairing damaged structures and infrastructure and for a rapid recovery of the involved region’s economy. In this context, the Catastrophe Bonds (CAT bonds) are risk-linked securities adopted by insurers to transfer potential high losses to the capital markets. Despite their growing importance, CAT bond pricing formulations and risk-managing solutions based on this financial tool are still limited. For these reasons, this paper wants to propose a general methodology for designing a CAT bond-based loss-coverage scheme for a distributed portfolio, with a pricing formulation able to consider uncertainties deriving from model parameters. The framework is applied to the residential building stock of Italy, proposing an ad-hoc CAT bond-based coverage scheme that consider three different levels of default risk.