Estimating the Value of the Wincat Coupons Of the Winterthur Insurance Convertible Bond

Tile three annual 2¼% interest coupons of the Winterthur Insurance convertible bond (face value CHF 4 700) will only be prod out if during their corresponding observation periods no major storm or had storm on one single day damages at least 6000 motor vehicles insured with Winterthur Insurance. Data for events, where storm or haft damaged more than 1,000 insured vehicles, are available for the last ten years. Using a constant- parameter model, the estimated discounted value of the three WINCAT coupons together is CHF 263 29 A conservative evaluation, which accounts for the standard deviation of the estimate, gives a coupon value of CHF 238.25 However, fitting models which admit a trend or a change-point, leads to substantially higher knock-out probabilities of the coupons. The estimated discounted values of the coupons can drop below the above conservative value, a conservative evaluation as above leads to substantially lower values. Hence, already the model uncertainty is higher than the standard deviations of the used estimators This shows the dominance of the model risk Consistency, dispersion, robustness and sensitivity of the models are analyzed by a simulation study. KEY WORDS: WINCAT coupon, Winterthur Insurance, catastrophe bond, storm, had, model risk, (generalized) Pareto distribution, generalized extreme value distribution, composite Poisson model, generalized linear model, change- point, peaks over threshold.