Research

Tail Overweighting in Catastrophe Bond Pricing

Since the late 20th century, (re)insurers have transferred severe natural catastrophe risks via catastrophe (cat) bonds directly to the capital market. Despite their low correlation with traditional financial markets, these bonds exhibit substantial risk premiums - an observation that contradicts standard asset pricing models, which predict lower risk premiums due to the absence of systematic risk. This study proposes a novel explanation: the observed spreads result, in part, from an overweighting of extreme tail risks in the pricing process. To formalize this idea, a theoretical pricing model is developed that incorporates an overweighting of jump components. The model is empirically validated on the risk peril “cyber”, using a unique loss dataset provided by a leading risk modeling agency, and complemented by an analysis of Florida named-storm bonds. The results show that as the likelihood of a trigger event decreases, the relative tail overweighting increases - similar to the volatility smile in options markets. Once bond-specific risk factors are identified and combined with this tail-based approach, the model has the potential to explain cat bond spreads with high accuracy.

Optimal Government Intervention for Extreme Risks

Working Paper with Alexander Braun & Martin Eling

We develop a model of insurance markets in the presence of globally diversifiable and globally undiversifiable risk. A firm seeks coverage from an insurer who, in turn, may purchase reinsurance and/or place excess risk in the capital market. Securitization through catastrophe bonds preserves private-sector risk sharing for globally diversifiable risk. For globally undiversifiable risk, however, the firm's probability of default can only be curtailed through government intervention. We show that an ex-ante government backstop in the highest loss layers dominates other interventions, particularly an ex-post disaster relief program because it maximizes the risk borne by the private sector.

Preferences during Crisis: The Causal Role of Public Policy and Culture

Working Paper with Martin Eling

Crises have profound and varied impacts on individual and societal behaviors, shaping preferences and decision-making processes. Switzerland, with its distinct language regions and shared institutional frameworks, provides a unique setting to explore how the Covid-19 pandemic influenced risk and time preferences across cultural boundaries. Our results show that the pandemic made people more risk averse, more patient, and diminished preexisting cultural differences. We provide causal evidence that the shift from regional to uniform nationwide restrictions during the pandemic altered social behavior and beliefs and their interaction with individuals' cultural backgrounds drove changes in preferences. These findings underscore the importance of considering cultural and societal dimensions in policy design, especially during crises.

Discrete dynamic pricing and application of network revenue management for FlixBus

Journal of Revenue and Pricing Management

with Christiane Barz, Simon Laumer & Jesús Martínez-Blanco

We consider a real discrete pricing problem in network revenue management for FlixBus. We improve the company's current pricing policy by an intermediate optimization step using booking limits from standard deterministic linear programs. We pay special attention to computational efficiency. FlixBus' strategic decision to allow for low-cost refunds might encourage large group bookings early in the booking process. In this context, we discuss counter-intuitive findings comparing booking limits with static bid price policies. We investigate the theoretical question whether the standard deterministic linear program for network revenue management does provide an upper bound on the optimal expected revenue if customer's willingness to pay varies over time.

Women and retirement planning:
Solutions and recommendations for a sustainable improvement in the pension situation of women

I.VW. Schriftreihe (in German)

with Martin Eling

The aim of this study is to highlight a significant issue in our pension system. Women's pensions in Switzerland are approximately one-third lower than men's, largely due to differences in employment histories. In Switzerland, however, a number of institutional deficiencies exacerbate the issue, leading to an above-average "gender pension gap" in international comparison. These deficiencies include the entry threshold and coordination deduction in occupational pensions, as well as insufficient consideration of caregiving periods within the pension system. This warrants scrutiny from a social policy perspective.

To initiate political discussions on reducing the gender pension gap, we developed seven reform proposals, which we put forward in a representative population survey (1,197 participants conducted by gfs-Zurich) and an expert survey (40 participants). Both the public and experts overwhelmingly agreed that:

1. the entry threshold for occupational pensions should be abolished,

2. the minimum age for saving in occupational pensions should be lowered to 18, and

3. there should be an option to backfill potential gaps in Pillar 3a due to childcare or caregiving breaks.

We interpret the agreement between the public and experts as a clear mandate for political action. This does not imply that every aspect must be implemented, but that the political feasibility of these proposals should be examined. From our perspective, reducing the entry threshold and minimum age are both sensible and politically feasible measures. We also advocate for expanding access to Pillar 3a, reducing the coordination deduction, and raising the retirement age—three additional measures that can be implemented without major structural changes.

The study results also reveal that women tend to engage with pension issues later than men and have less financial and pension-related knowledge. Thus, in addition to proposing structural improvements, the study advocates for greater personal responsibility, encouraging women to address pension planning as early as possible so that they can better set the course for adequate retirement income.

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