An Empirical Review of Basis Risk Assessment of Triggers i.e. Index, Model-Based and the Hybrid Triggers in Lieu of Individual and Industry Losses

The absolute value of the distinguishing factor that exist between losses employed in triggering the occurrences of CAT bonds and the exact losses for an insurer is considered Basis Risk. This kind of risk is not only related to insurers only but also CAT bond investors as well. This is because both parties somewhat may suffer from the loss of basis risk. It is noteworthy that Basis risk could be considered a zero-sum game for both counterparties i.e. investors and insurers respectively when there is a trade in of CAT bonds.