A Model-Independent Lower Bound for the Price of Swiss Re Mortality Bond 2003

Abstract

The Swiss Re Mortality Bond 2003 was the maiden catastrophic mortality bond to be issued in the insurance market. Catastrophic bonds are designed with the aim to aid insurance companies circumvent the risk that arises in the event of a major catastrophe which cannot be covered with premiums. This bond captures the behaviour of a well-defined mortality index to generate pay-offs for bondholders. Pricing of catastrophic mortality bonds is an interesting problem and no closed form solution can be found in the existing literature. In our approach, we express the pay-off of such a bond in terms of the pay-off of an Asian put option in a manner similar to [1] and present an efficient model-independent lower bound by making some very general assumptions. We then run Monte Carlo simulations to estimate the bond price and illustrate the quality of the bound for a variety of models.