Elaborating a Catastrophic Loss Index for Insurance-linked Securities (ILS): A Continuous Model

This paper proposes a continuous random modeling of catastrophic loss indexes underlying insurance-linked securities (ILS), by convolution of each catastrophic event’s amount of reported claims. This variable is calculated, in turn, as the difference between the catastrophe’s total severity, on one hand, and its amount of incurred-but-not-yet-reported claims, which is considered to be driven by a geometric Brownian motion, on the other hand. Parameters estimation and verification of the goodness-of-fit to a sample of data series on floods in Spain have subsequently been conducted in order to test the model’s validity.