Pricing Catastrophe Derivatives Using A Recursive Evaluation Approach

This paper assumes that the underlying aggregate catastrophe claims process is the compound Poisson process and applies the recursive evaluation approach to compute the compound Poisson distribution. A novel, practical pricing model is developed for catastrophe insurance derivatives. The proposed pricing model simplifies the procedure of probability computation, particularly for massive catastrophe claims, and helps hedging insurance companies apply probability assessment techniques to identify derivative prices. The recursive evaluation approach to price catastrophe derivatives is more effective than the conventional Monte Carlo simulation scheme in terms of the required computing time and precision.