Catastrophe risk pricing: an empirical analysis

Morton Lane and Olivier Mahul

No 4765, Policy Research Working Paper Series from The World Bank

Abstract: The price of catastrophe risks is viewed by many to be too high and/or too volatile. Catastrophe risk practitioners point out that, contrary to standard insurance, such as automobile insurance, catastrophe re-insurance is exposed to infrequent but potentially very large losses. It thus requires keeping a large amount of capital in hand, generating a cost of capital to be added to the long-term expected loss. This paper pulls together data from about 250 catastrophe bonds issued on the capital markets to investigate how catastrophe risks are priced. The analysis reveals that catastrophe risk prices are a function of the underlying peril, the expected loss, the wider capital market cycle, and the risk profile of the transaction. The market-based catastrophe risk price is estimated to be 2.69 times the expected loss over the long term, that is, the long-term average multiple is 2.69. When adjusted from the market cycle, the multiple is estimated at 2.33. Peak perils like US Wind are shown to have a much higher multiple than that of non-peak perils like Japan Wind, revealing the diversification of credit from the market.

Keywords: Markets and Market Access; Insurance&Risk Mitigation; Debt Markets; Access to Markets; Emerging Markets (search for similar items in EconPapers)
Date: 2008-11-01
New Economics Papers: this item is included in nep-ias and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... ered/PDF/WPS4765.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:4765

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().