Cat bonds & Artificial Neural Networks | An example of reinsurance products’ pricing using machine learning methods

Over the last fifty years, numbers and costs of natural disasters have not ceased to multiply. Given this phenomenon, insurers and reinsurers struggle to cover the associated losses. Consequently, they turned to financial markets in order to obtain new hedging capabilities, by using various types of products, such as excess of loss contracts (named XL) and cat bonds.

This white paper presents a mathematic model allowing to predict the number and the cost of incoming catastrophes. Data used include wind catastrophes affecting the southeast area of the United States and whose damages are worth more than a billion dollars. This model helps to price insurance risk transfer products, such as XL contracts or cat bonds.