Catastrophe Risk Pricing : An Empirical Analysis
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...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/11/9993138/catastrophe-risk-pricing-empirical-analysis http://hdl.handle.net/10986/6900 |
| Summary: | 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. |
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