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.