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1

2 Catastrophe Bond: CatBond

3 Alternative Risk TransferART ART ART ART Catastrophe BondCatBond CatBond

4 Research on the natural disaster risk equalization using the financial technique in social infrastructure management Summary The natural disaster risks in social infrastructure management are an increase of maintenance costs and a decrease of revenue from toll road etc., as well as direct damage such as injury to structures. The natural disaster occurs without regularity, so we need equalization of these risks. In this research, we survey the financial technique called as Alternative Risk Transfer (ART) that is being practically used for the natural disaster risk equalization in the private sector. In chapter 1, we survey the characteristics of natural disaster in Japan, the damage conditions of natural disasters that occurred in recent years, and the present system such as disaster restoration works and damage insurance. We classify the risks in social infrastructure management by causal relationship between damage and natural disaster, and examine to what extent the present system covers the damage. The damage with unclear causality is not covered in the present system, so it is considered there is possibility that ART is applicable to the natural disaster risk equalization. In chapter 2, we survey ART, a technique of risk equalization using financial engineering. By ART, the natural disaster risk is transferred to capital market, not to insurers, therefore ART has merits that great damage can be compensated, for example. Specifically about three techniques of ART Catastrophe Bond, Weather Derivative and Captive, we examine fundamental schemes, the use situation in private sector, and the merits/demerits. The major demerit is that Catastrophe bond and Weather Derivative has basis risk (risk of difference between the amount of damage and compensation), so the product design requires risk analysis with precision. Key word: Natural disaster, Risk equalization, Catastrophe Bond, Weather Derivative, Captive

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22 CatBondCatastrophe Bond: CatBond CatBond ex CatBond Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES 15

23 : Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES CatBond 2-3 CatBond SPV 19 CatBond CatBond SPV Special Purpose Vehicle SPCSpecial Purpose Company 20 CatBond 16

24 SPV SPV) CatBond CatBond CatBond

25 6 LIBOR LIBOR London Interbank Offered Rate LIBOR (BBA)BBA Standard & Poor's 18

26 CatBond CatBond 2-5 Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES CatBond 23 CatBond LA CatBond

27 Winterthur 6 Notes Residential Re 82 ClassA-1Notes 313 ClassA-2Notes SLF Re I 30 Swiss Re Cal Eq 60 B Notes 15 C Notes 25 ClassA-1Notes 12 ClassA-2Notes Parametric Re Notes Units Trinity Re 11 ClassA-1 Notes 61 ClassA-2 Notes SLF Re 10 SLF Re 35 Residential Re 450 Notes Pacific Re 80 Notes Mosaic Re 9 Certificate 15 ClassA Notes 21 ClassB Notes Mid Ocean Re A B Trinity Re 2.5 ClassA-1Notes 51.6 ClassA-2Notes Mosaic Re 1.4 Certificate 24.3 ClassA Notes 20 ClassB Notes SLF Re 10 Halyard Re 17 Notes Residential Re 200 Notes Domestic Re 80 Notes 20 Shares Gemini Re 150 Notes Concentric 100 Notes 20

28 Juno Re 80 Notes Gold Eagle 50 ClassA Notes ClassB Notes 5.5 ClassB Shares Namazu Re 100 Notes Seismic Ltd Notes 4.5 Shares Atlas Re 70 ClassA Notes 30 ClassB Notes 100 ClassC Notes Atlas Re 70 ClassA Notes 30 ClassB Notes 100 ClassC Notes Alpha Wind 37.5 Shares 52.5 Notes Halyard 17 Notes Re 2000 Residential Re 200 Notes NeHi 41.5 Notes 8.5 Shares Mediterranean 41 ClassA Notes Re 88 ClassB Notes Prime Capital 159 Notes 6 Shares 3 Units Prime Capital 129 Notes 6 ClassB Shares 3 Units Western Capital 97 Notes 3 Shares Gold Eagle Notes 3.6 ClassB Shares SR Wind 58.2 ClassA-1 Notes 58.2 ClassA-2 Notes 1.8 ClassB-1 Shares 1.8 ClassB-2 Shares Residential Re 150 Notes

29 Trinom Ltd 60 ClassA-1 Notes 97 ClassA-2 Notes 4.9 Shares Redwood 160 Notes Capital 4.95 Pref Shares Atlas 50 ClassA Notes 100 ClassB Notes Redwood 194 Notes Capital 6 Preference St. Agatha Re 33 Notes K3 230 Residential Re 125 Notes 2002 Fujiyama Ltd 67.9 Notes 2.1 Pref Shares Pioneer ClassA Notes Ltd. 76 ClassB Notes 66.2 ClassC Notes ClassD Notes ClassE Notes 28 ClassF Notes Studio Re Ltd 150 Notes 25 Preference Shares Residential Re 160 Notes 2003 Phoenix Quake Notes Wind Ltd Phoenix Quake Notes Ltd Phoenix Quake 85 Notes Wind Ltd Palm Capital Notes Ltd. Oak Capital Ltd Notes 22

30 Sequoia Capital Ltd 22.5 Notes Sakura Ltd Notes Arbor Ltd Notes Arbor Ltd Notes Pioneer2002 Ltd ClassA Notes ClassB Notes ClassC Notes 59.1 ClassD Notes 8 ClassE Notes 8.14 ClassF Notes Formosa Re 100 Notes Redwood Capital Redwood Capital 150 Notes 200 Notes Pylon Ltd Series A Notes Series B Notes Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES Standard & Poor's Fitch 23

31 CatBond CatBond BB A B B BB BBB A AA AAA Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES CatBond CatBond 2-8 Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES

32 CatBond 2-5 CatBond CatBond 26 CatBond CatBond CatBond Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES CatBond CatBond (indemnity base) index base CatBond

33 Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES Market Update :The Catastrophe Bond Market at year-end 2003, MMC SECURITIES 26

34 Market Update :The Catastrophe Bond Market at year-end 2002, MMC SECURITIES

35 CatBond 2-12 CatBond WTC AAA CatBond CatBond CatBond CatBond CatBond 28

36 CatBond SPV SPV CatBond 29

37 WRMA OTC 34 3,200 CME 35 21, Results of 2004 PwC SurveyPricewaterhouseCoopers Weather Risk Management Association OTCOver the Counter 35 The Chicago Mercantile Exchange 36 CME OTC WRMA 30

38 Results of 2004 PwC SurveyPricewaterhouseCoopers Results of 2004 PwC SurveyPricewaterhouseCoopers

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41 42 OTC : : : : : { ()( ) } () : : : 42 34

42 2001 OTC CME Results of 2004 PwC SurveyPricewaterhouseCoopers 2-6,7,

43 Results of 2004 PwC SurveyPricewaterhouseCoopers TIFFE 36

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74 (2003) (2003) 2004 (2004)(2005) (2000) (2003) (1996) (2004) Swiss Re(2003)[Sigma ] MMC SECURITIES(2004) Market Update :The Catastrophe Bond Market at year-end 2003 MMC SECURITIES(2003) Market Update :The Catastrophe Bond Market at year-end 2002 PricewaterhouseCoopers(2004) Results of 2004 PwC Survey June 10,2004 URL

75 Hannover Rehttp:// Swiss Rehttp:// Weather Risk Management Associationhttp:// 66

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