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...
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| Format: | Policy Research Working Paper |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2008/11/9993138/catastrophe-risk-pricing-empirical-analysis http://hdl.handle.net/10986/6900 |
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okr-10986-69002021-04-23T14:02:32Z Catastrophe Risk Pricing : An Empirical Analysis Lane, Morton Mahul, Olivier ACTUARIAL STUDIES ACTUARIES AMOUNT OF CAPITAL AUTOMOBILE INSURANCE BASIS POINTS BOND BOND PRICES BROKER BROKERS BUDGETING CAPITAL ALLOCATION CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENTS CAPITAL STRUCTURE CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHE COVERAGE CATASTROPHE REINSURANCE CATASTROPHES CEDANTS COST OF CAPITAL COST OF EQUITY COVERAGE DEVELOPING COUNTRIES DISCLOSURE REQUIREMENTS DIVERSIFICATION OF CREDIT EQUITY CAPITAL EXCESS RETURN EXPOSURE FAIR FINANCIAL INSTITUTIONS FINANCIAL MANAGEMENT GLOBAL CAPITAL GLOBAL CAPITAL MARKET INDIVIDUAL SECURITIES INSURANCE INSURANCE COMPANIES INSURANCE COMPANY INSURANCE RISK INSURER INTERNATIONAL BANK INTERNATIONAL FINANCIAL INSTITUTIONS ISSUANCE LEVEL OF RISK LIABILITY LIABILITY INSURANCE LLC MARKET CONDITIONS MARKET PARTICIPANTS MARKET PRACTICES MARKET PRICES MARKET PRICING MARKET RISK MARKET YIELDS MATURITY NEW MARKET PORTFOLIO PORTFOLIOS PREMIUMS PRICE INDEX PRICE INDICES PRICE MOVEMENTS PRICE VOLATILITY PRICES INDICES PRICING MODEL PRICING PRACTICE PRICING MODEL PRIMARY INSURERS PRIVATE PLACEMENTS PRIVATE SECTOR DEVELOPMENT PUBLIC MARKET RATE OF RETURN RATES RE-INSURANCE REGULATORS REINSURANCE CAPACITY REINSURERS RETURN RETURNS RISK ANALYSIS RISK MANAGEMENT RISK PROFILE RISK PROFILES SECONDARY MARKET SECONDARY MARKET PRICES SECONDARY TRADING SECURITIES SECURITIES MARKET SECURITY MARKETS SHAREHOLDERS SIMULTANEOUS ISSUE SOLVENCY SPREAD TRADES TRADING TRADITIONAL MARKET TRADITIONAL MARKETS TRANCHES TRANSACTION TRANSACTION PRICES UNDERWRITER UNDERWRITING WORKERS COMPENSATION 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. 2012-06-01T18:32:30Z 2012-06-01T18:32:30Z 2008-11 http://documents.worldbank.org/curated/en/2008/11/9993138/catastrophe-risk-pricing-empirical-analysis http://hdl.handle.net/10986/6900 English Policy Research Working Paper; No. 4765 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ACTUARIAL STUDIES ACTUARIES AMOUNT OF CAPITAL AUTOMOBILE INSURANCE BASIS POINTS BOND BOND PRICES BROKER BROKERS BUDGETING CAPITAL ALLOCATION CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENTS CAPITAL STRUCTURE CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHE COVERAGE CATASTROPHE REINSURANCE CATASTROPHES CEDANTS COST OF CAPITAL COST OF EQUITY COVERAGE DEVELOPING COUNTRIES DISCLOSURE REQUIREMENTS DIVERSIFICATION OF CREDIT EQUITY CAPITAL EXCESS RETURN EXPOSURE FAIR FINANCIAL INSTITUTIONS FINANCIAL MANAGEMENT GLOBAL CAPITAL GLOBAL CAPITAL MARKET INDIVIDUAL SECURITIES INSURANCE INSURANCE COMPANIES INSURANCE COMPANY INSURANCE RISK INSURER INTERNATIONAL BANK INTERNATIONAL FINANCIAL INSTITUTIONS ISSUANCE LEVEL OF RISK LIABILITY LIABILITY INSURANCE LLC MARKET CONDITIONS MARKET PARTICIPANTS MARKET PRACTICES MARKET PRICES MARKET PRICING MARKET RISK MARKET YIELDS MATURITY NEW MARKET PORTFOLIO PORTFOLIOS PREMIUMS PRICE INDEX PRICE INDICES PRICE MOVEMENTS PRICE VOLATILITY PRICES INDICES PRICING MODEL PRICING PRACTICE PRICING MODEL PRIMARY INSURERS PRIVATE PLACEMENTS PRIVATE SECTOR DEVELOPMENT PUBLIC MARKET RATE OF RETURN RATES RE-INSURANCE REGULATORS REINSURANCE CAPACITY REINSURERS RETURN RETURNS RISK ANALYSIS RISK MANAGEMENT RISK PROFILE RISK PROFILES SECONDARY MARKET SECONDARY MARKET PRICES SECONDARY TRADING SECURITIES SECURITIES MARKET SECURITY MARKETS SHAREHOLDERS SIMULTANEOUS ISSUE SOLVENCY SPREAD TRADES TRADING TRADITIONAL MARKET TRADITIONAL MARKETS TRANCHES TRANSACTION TRANSACTION PRICES UNDERWRITER UNDERWRITING WORKERS COMPENSATION |
| spellingShingle |
ACTUARIAL STUDIES ACTUARIES AMOUNT OF CAPITAL AUTOMOBILE INSURANCE BASIS POINTS BOND BOND PRICES BROKER BROKERS BUDGETING CAPITAL ALLOCATION CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENTS CAPITAL STRUCTURE CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHE COVERAGE CATASTROPHE REINSURANCE CATASTROPHES CEDANTS COST OF CAPITAL COST OF EQUITY COVERAGE DEVELOPING COUNTRIES DISCLOSURE REQUIREMENTS DIVERSIFICATION OF CREDIT EQUITY CAPITAL EXCESS RETURN EXPOSURE FAIR FINANCIAL INSTITUTIONS FINANCIAL MANAGEMENT GLOBAL CAPITAL GLOBAL CAPITAL MARKET INDIVIDUAL SECURITIES INSURANCE INSURANCE COMPANIES INSURANCE COMPANY INSURANCE RISK INSURER INTERNATIONAL BANK INTERNATIONAL FINANCIAL INSTITUTIONS ISSUANCE LEVEL OF RISK LIABILITY LIABILITY INSURANCE LLC MARKET CONDITIONS MARKET PARTICIPANTS MARKET PRACTICES MARKET PRICES MARKET PRICING MARKET RISK MARKET YIELDS MATURITY NEW MARKET PORTFOLIO PORTFOLIOS PREMIUMS PRICE INDEX PRICE INDICES PRICE MOVEMENTS PRICE VOLATILITY PRICES INDICES PRICING MODEL PRICING PRACTICE PRICING MODEL PRIMARY INSURERS PRIVATE PLACEMENTS PRIVATE SECTOR DEVELOPMENT PUBLIC MARKET RATE OF RETURN RATES RE-INSURANCE REGULATORS REINSURANCE CAPACITY REINSURERS RETURN RETURNS RISK ANALYSIS RISK MANAGEMENT RISK PROFILE RISK PROFILES SECONDARY MARKET SECONDARY MARKET PRICES SECONDARY TRADING SECURITIES SECURITIES MARKET SECURITY MARKETS SHAREHOLDERS SIMULTANEOUS ISSUE SOLVENCY SPREAD TRADES TRADING TRADITIONAL MARKET TRADITIONAL MARKETS TRANCHES TRANSACTION TRANSACTION PRICES UNDERWRITER UNDERWRITING WORKERS COMPENSATION Lane, Morton Mahul, Olivier Catastrophe Risk Pricing : An Empirical Analysis |
| relation |
Policy Research Working Paper; No. 4765 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Lane, Morton Mahul, Olivier |
| author_facet |
Lane, Morton Mahul, Olivier |
| author_sort |
Lane, Morton |
| title |
Catastrophe Risk Pricing : An Empirical Analysis |
| title_short |
Catastrophe Risk Pricing : An Empirical Analysis |
| title_full |
Catastrophe Risk Pricing : An Empirical Analysis |
| title_fullStr |
Catastrophe Risk Pricing : An Empirical Analysis |
| title_full_unstemmed |
Catastrophe Risk Pricing : An Empirical Analysis |
| title_sort |
catastrophe risk pricing : an empirical analysis |
| publisher |
World Bank, Washington, DC |
| publishDate |
2012 |
| url |
http://documents.worldbank.org/curated/en/2008/11/9993138/catastrophe-risk-pricing-empirical-analysis http://hdl.handle.net/10986/6900 |
| _version_ |
1764401285682954240 |