In January 1997, Winterthur Insurance, together with Credit Suisse First Boston (CSFB), issued the first listed CAT bond. The annual “WINCAT0 coupons of this three-year convertible bond are knocked out if any single storm event damages more than 6,000 vehicles insured by Winterthur Insurance in Switzerland.

This was a completely new way of securing insurance risks. The main intention was to test the Swiss capital market for such products and to make investors acquainted with them. Thereby Winterthur, together with CSFB, set new standards in product transparency, fairness of pricing and investor education by making the historical data available via internet and by publishing a special brochure (CSFB (1997)), where the pricing and the mathematical modelling are described in detail. This is also a prerequisite to enable a scientific discussion on pricing aspects of such new financial products. The developers of the bond are therefore grateful to Mr. Schmock for this valuable scientific contribution which can be seen as a thorough and profound statistical analysis on the knock-out probability for the purpose of quantifying the model uncertainty.

In Section 2 we briefly summarize the whole pricing of the bond at the issue date and show that there were several risk premium elements in this pricing where the conservative estimation of the knock-out probability was just one of them. In Section 3 we consider the modelling of low frequency risks from a practitioner's standpoint and formulate some requirements from practice. In Section 4 we make some further comments on the modelling of the Wincat data. Section 5 is a short summary.