Title: Better Prices, Better Decisions: A New Approach to CAT Bond Premiums
Abstract: This paper studies CAT-bond pricing and decision-making. Instead of modeling issuance spreads, which embed expected loss and can inflate fit, we model the premium (spread minus expected loss) and summarize market conditions with issuance-size-weighted indices of premium level and volatility. Estimating a log-normal GAMLSS with covariate-dependent variance yields cleaner residuals and stronger out-of-sample forecasts than linear benchmarks. We then embed the forecasts in a realistic issuance problem. The GAMLSS model delivers consistently better outcomes: higher expected utility for risk-averse sponsors, higher expected profit, and greater optimal market participation across market states, than the linear benchmarks. By aligning pricing with decision-relevant uncertainty, our approach links improved statistical modeling directly to better issuance choices and a more resilient CAT-bond market.
Bio of the speaker:
Dr. Hong Li is a Professor in the Department of Economics and Finance at the University of Guelph's Gordon S. Lang School of Business and an Adjunct Associate Professor in the Department of Statistics and Actuarial Science at the University of Waterloo. The University of Guelph, his primary academic home, is recognized for its leading actuarial science program, ranking first in Canada and ninth in North America on the University of Nebraska Lincoln's Business School RMI & Actuarial Science Rankings (2019-2023).
He is a distinguished actuary, holding the designations of Fellow of the Society of Actuaries (FSA) and Associate of the Canadian Institute of Actuaries (ACIA). His research program is centered on data analytics in insurance, with specific expertise in CAT bonds, index insurance, and mortality and longevity studies.
Dr. Li is actively engaged in the academic community, serving on the editorial boards of the Annals of Actuarial Science and the Journal of Risk and Insurance. He further contributes to the profession as a member of the Academic Research Committee for the Canadian Institute of Actuaries and as a grader and question maker for the Society of Actuaries' fellowship exams.