Lane, MortonMahul, Olivier2012-06-012012-06-012008-11https://hdl.handle.net/10986/6900The 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.CC BY 3.0 IGOACTUARIAL STUDIESACTUARIESAMOUNT OF CAPITALAUTOMOBILE INSURANCEBASIS POINTSBONDBOND PRICESBROKERBROKERSBUDGETINGCAPITAL ALLOCATIONCAPITAL MARKETCAPITAL MARKETSCAPITAL REQUIREMENTSCAPITAL STRUCTURECATASTROPHE BONDCATASTROPHE BONDSCATASTROPHE COVERAGECATASTROPHE REINSURANCECATASTROPHESCEDANTSCOST OF CAPITALCOST OF EQUITYCOVERAGEDEVELOPING COUNTRIESDISCLOSURE REQUIREMENTSDIVERSIFICATION OF CREDITEQUITY CAPITALEXCESS RETURNEXPOSUREFAIRFINANCIAL INSTITUTIONSFINANCIAL MANAGEMENTGLOBAL CAPITALGLOBAL CAPITAL MARKETINDIVIDUAL SECURITIESINSURANCEINSURANCE COMPANIESINSURANCE COMPANYINSURANCE RISKINSURERINTERNATIONAL BANKINTERNATIONAL FINANCIAL INSTITUTIONSISSUANCELEVEL OF RISKLIABILITYLIABILITY INSURANCELLCMARKET CONDITIONSMARKET PARTICIPANTSMARKET PRACTICESMARKET PRICESMARKET PRICINGMARKET RISKMARKET YIELDSMATURITYNEW MARKETPORTFOLIOPORTFOLIOSPREMIUMSPRICE INDEXPRICE INDICESPRICE MOVEMENTSPRICE VOLATILITYPRICES INDICESPRICING MODELPRICING PRACTICEPRICING ­ MODELPRIMARY INSURERSPRIVATE PLACEMENTSPRIVATE SECTOR DEVELOPMENTPUBLIC MARKETRATE OF RETURNRATESRE-INSURANCEREGULATORSREINSURANCE CAPACITYREINSURERSRETURNRETURNSRISK ANALYSISRISK MANAGEMENTRISK PROFILERISK PROFILESSECONDARY MARKETSECONDARY MARKET PRICESSECONDARY TRADINGSECURITIESSECURITIES MARKETSECURITY MARKETSSHAREHOLDERSSIMULTANEOUS ISSUESOLVENCYSPREADTRADESTRADINGTRADITIONAL MARKETTRADITIONAL MARKETSTRANCHESTRANSACTIONTRANSACTION PRICESUNDERWRITERUNDERWRITINGWORKERS COMPENSATIONWorld Bank10.1596/1813-9450-4765