Catastrophe Bonds for Transportation Assets Feasibility Analysis for Bridges
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abstract
Recent catastrophic events such as floods and earthquakes have underlined the need for rapid infusion of financial and other resources to facilitate repair and reconstruction of damaged facilities and lifeline infrastructure. Because bridge structures are a major component of the essential transportation infrastructure, they require timely application of maintenance and repair. To mitigate risks associated with natural hazards and associated impacts on bridges, it is necessary to adopt suitable financial tools. Hazard-linked securities such as catastrophe (CAT) bonds are financial tools that have called the attention of investors as a risk-mitigating instrument that supports fast recovery of communities and businesses. The benefits of CAT bonds are twofold: the bonds ensure that financial resources are readily available to cover potential losses in the wake of a natural hazard, and they provide attractive returns with risks uncorrelated with other, more traditional financial assets, such as stocks or corporate bonds. This paper presents a model for determining the risk premium (spread) implied by the default-triggering event and structural design parameters. A risk-neutral costbenefit method for pricing the risk premium (spread) is presented. Examples of conventionally designed and seismically designed bridges illustrate the implication of structural design parameters on the risk premium and the corresponding utility of these structures as potential CAT bond investments.
