A CAT bond-based coverage scheme proposal for Italy

Catastrophe bonds (CAT bonds) are risk-linked securities used by the insurance industry to transfer risks associated with the occurrence of natural disasters to the capital markets. Despite their growing importance, relatively few studies on CAT bond pricing, design and their application are available in the literature. Indeed, existing pricing formulations for pricing analysis do not account for uncertainties in model parameters and are not contextualized in a more general CAT bond coverage design procedure for an area of interest with a distributed portfolio. For these reasons, this paper presents a general procedure for designing a CAT bond-based coverage for a spatially distributed portfolio against losses due to natural hazards. The procedure is then applied to a case study represented by the residential building portfolio in Italy, aiming to design a CAT bond-based coverage scheme against losses induced by seismic events all over the entire national borders.