Catastrophe Bond and Risk Modeling: A Review and Calibration Using Chinese Earthquake Loss Data

Earthquake risks are attracting increased attention as a result of recent catastrophic events such as the Wenchuan earthquake in China. This article aims to select, tailor, and develop loss modeling methods for catastrophic insurance. We review the state-of-the-art approaches in modeling catastrophe losses for catastrophe bonds' modeling and pricing. The methods are applied to the 1966-2008 losses resulted from the earthquakes in China. Various error measures are proposed for validating catastrophe modeling. Results suggest that the double exponential jump-diffusion model fits the data well.