Price model of multiple-trigger flood bond with trigger indices of aggregate losses and maximum number of submerged houses

This study aims to model multiple-trigger flood bond (FB) prices with trigger indices of aggregate losses and the maximum number of submerged houses. These trigger indices are generated by the compound processes: flood frequency and loss for aggregate losses and flood frequency and number of submerged houses for the maximum number of submerged houses. Then, we used the risk-neutral pricing measure under the stochastic assumptions of annual interest rates to model FB prices. Then, calibration and estimation of model parameters are conducted on Indonesia's flood data. To estimate the model solution, we demonstrate the numerical simulation using the Monte Carlo method, resulting in the small deviation standard of the estimated FB price. Finally, sensitivity analyses are also conducted. It shows that the FB term, annual flood intensity, and trigger event correlation rate negatively correlate with the FB price, while the correlation rate of annual interest rate and FB prices positively correlate. This research can be used by practitioners (e.g., the climate or weather agencies) to measure the flood severity in terms of the maximum number of submerged houses and aggregate losses. Then, FB issuers can use the FB price model to estimate fair FB prices that better reflect the flood severity.