ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

Alternative to Insurance Risk Transfer: Creating a catastrophe bond for Romanian earthquakes

Apostolos Kiohos and Maria Paspati

Correspondence: Apostolos Kiohos,

Department of International and European Studies, University of Macedonia, Greece

pdf (1102.31 Kb) | doi:


As the severity of natural catastrophes continues to intensify, in terms of the economic, environmental and human impacts, disaster risk management is becoming increasingly significant. The limitations of the insurance and reinsurance market capacity led to the development of alternative risk transfer products. These products are designed to alleviate the risk, in whole or partly, by putting into effect securitisation mechanisms that increase liquidity. Among them, catastrophe risk bonds are designed to transfer the financial consequences of natural catastrophic events (e.g. floods, hurricanes, earthquakes etc.) from the issuers to investors. Within this context, this paper investigates the effects of earthquakes in Romania and suggests a catastrophe bond issuance that offers coverage in case of large earthquakes. Through this mechanism, Romanian governmental authorities will attain sufficient and sustainable fund liquidity for covering the financial obligations following a catastrophic earthquake.


  Alternative Risk Transfer, Natural Catastrophe, Insurance–Reinsurance, Catastrophe bond, Earthquake, Romania.


Armaş, I. (2006) Earthquake risk perception in Bucharest, Romania. Risk Analysis, 26(5), 1223-1234.Ayuketang Arreyndip, N., and Ebobenow, J. (2016) Generalized extreme value distribution models for the assessment of seasonal wind energy potential of Debuncha, Cameroon. Journal of Renewable Energy, 2016, 1-9.Banks, E. (2008) Overview of Risk Management and Alternative Risk Transfer. In Fabozzi, F.J., Ed., Handbook of Finance, Volume III. Valuation, Financial Modeling, and Qualitative Tools, John Wiley & Sons, Inc., New Jersey, 39-52.Bantwal, V.J. and Kunreuther, H.C. (2000). A cat bond premium puzzle?. The Journal of Psychology and Financial Markets, 1(1), 76-91.Bernard, C. (2013) Risk Sharing and Pricing in the Reinsurance Market. In Dionne, G., Ed., Handbook of Insurance, Second Edition, Springer Science + Business Media, New York, 603-626.Centre for Research on the Epidemiology of Disasters (2009) Romania Country Profile., S.H., and Pedersen, H.W. (2000) Catastrophe risk bonds. North American Actuarial Journal, 4(4), 56-82.Cummins, J.D., and Weiss, M.A. (2009) Convergence of insurance and financial markets: Hybrid and securitized risk-transfer solutions. Journal of Risk and Insurance, 76(3), 493-545.Cummins, J.D. (2008). Cat bonds and other risk‐linked securities: state of the market and recent developments. Risk Management and Insurance Review, 11(1), 23-47.Embrechts, P., Resnick, S.I., and Samorodnitsky, G. (1999) Extreme Value Theory as a Risk Management Tools. North American Actuarial Journal, 3(2), 30-41.Evans, S. (2017) Generali Hails “Innovative & Flexible” Lion II Re Catastrophe bond. Facility for Disaster Reduction and Recovery (2019) Romania.ärdle, W.K., and Cabrera, B.L. (2010). Calibrating CAT bonds for Mexican earthquakes. Journal of Risk and Insurance, 77(3), 625-650.Jarrow, R.A. (2010). A simple robust model for CAT bond valuation. Finance Research Letters, 7(2), 72-79.Kollias, C. and Papadamou, S. (2016). Environmentally responsible and conventional market indices’ reaction to natural and anthropogenic adversity: A comparative analysis. Journal of Business Ethics, 138(3), 493-505.Lakdawalla, D. and, Zanjani, G. (2012) Catastrophe bonds, reinsurance, and the optimal collateralization of risk transfer. Journal of Risk and Insurance, 79(2), 449-476.Lang, D., Molina-Palacios, S., Lindholm, C., and Balan, S. (2012) Deterministic earthquake damage and loss assessment for the city of Bucharest, Romania. Journal of Seismology, 16(1), 67-88.Lee, J.P. and Yu, M.T. (2002). Pricing default-risky CAT bonds with moral hazard and basis risk. Journal of Risk and Insurance, 69(1), 25-44.Mărmureanu, G., Cioflan, C.O. and, Mărmureanu, A. (2011) Intensity seismic hazard map of Romania by probabilistic and (neo) deterministic approaches, linear and nonlinear analyses. Romanian Reports in Physics, 63(1), 226-239.Organisation for Economic Co-operation and Development (2018) Financial Management of Earthquake de Asigurare Împotriva Dezastrelor Naturale (2017) Despre PAID., B.E., Tobin, G.A., and Hagelman, R.R. (2017) Natural Hazards: Explanation and Integration, Second Edition, The Guilford Press, New York.Shao, J., Pantelous, A. and Papaioannou, A.D. (2015). Catastrophe risk bonds with applications to earthquakes. European Actuarial Journal, 5(1), 113-138.The International Bank for Reconstruction and Development/The World Bank. (2012). FONDEN: Mexico’s Natural Disaster Fund - A Review, Washington DC.The World Bank Group (2019a) Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option. World Bank Group (2019b) Strengthening Disaster Risk Management Project. World Bank (2018) Report No PGD23: – Romania - Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option., G.A. (2011) Strengthening of the Romanian Financing Capacity in Case of Natural Disaster. Proceedings of the 22nd International DAAAM Symposium, 22(1), 1127-1128.Zimbidis, A.A., Frangos, N.E., and Pantelous, A.A. (2007) Modeling earthquake risk via extreme value theory and pricing the respective catastrophe bonds. ASTIN Bulletin: The Journal of the International Actuarial Association (IAA), 37(1), 163-183.