OPTIONS AND SWAPS ON MOTOR CLAIMS

Abstract

In this paper, we introduce new motor insurance linked securities: motor loss rate ratchet options and motor loss rate swaps which can be used effectively by insurers to manage their liability risks by transferring loss rate risks to capital markets. We discuss the valuation of these customized over-the-counter hybrid securities under the assumption that motor insurance aggregate claims follow a compound Poisson distribution. The Fourier inversion method is employed for the numerical calculation of the risk neutral prices of the motor loss rate derivatives, and some illustrative examples are given based on a set of assumptions on the severity distribution and the model parameters.

Keywords:

• Securitization,
• Risk transfer,
• Ratchet option,
• Swaps,
• Motor insurance loss rates