Pricing in the Primary Market for Cat Bonds: New Empirical Evidence

37 Pages Posted: 11 Nov 2016

See all articles by Alexander Braun

Alexander Braun

University of St. Gallen - I.VW-HSG

Date Written: December 2016

Abstract

We present empirical evidence from the primary market for cat bonds, which provides new insights concerning the prevailing pricing practice of these instruments. For this purpose, transactional information from a multitude of sources has been collected and cross‐checked in order to compile a data set comprising virtually all cat bond tranches that were launched between June 1997 and December 2012. In order to identify the main determinants of the cat bond spread at issuance, a series of OLS regressions with heteroskedasticity‐ and autocorrelation‐consistent standard errors is run. Our results confirm the expected loss as the most important factor. Apart from that, covered territory, sponsor, reinsurance cycle, and the spreads on comparably rated corporate bonds exhibit a major impact. Based on these findings, we then propose an econometric cat bond pricing model that is applicable for all territories, perils, and trigger types. It exhibits a robust fit across different calibration subsamples and achieves a higher in‐sample and out‐of‐sample accuracy than several competing specifications that have been introduced in earlier work.

Suggested Citation

Braun, Alexander, Pricing in the Primary Market for Cat Bonds: New Empirical Evidence (December 2016). Journal of Risk and Insurance, Vol. 83, Issue 4, pp. 811-847, 2016. Available at SSRN: https://ssrn.com/abstract=2867715 or http://dx.doi.org/10.1111/jori.12067

Alexander Braun (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

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