Market-based catastrophe risk price found to be 2.69 times the expected loss over the long term

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. This is the finding of a study by Morton Lane and Olivier Mahul, Catastrophe Risk Pricing, prepared for the World Bank and published in November.

Morton Lane, the president of US broker-dealer Lane Financial, has been active for some years in the development of capital market instruments for catastrophe risks and of the theory behind them. Olivier Mahul is with Institut National de la Recherche Agronomique, Rennes, France.

Using data from about 250 catastrophe bonds, they estimated that the market-based catastrophe risk price was 2.69 times the expected loss over the long term. Adjusted from the market cycle, the multiple was estimated at 2.33. Peak perils, like US windstorm, were shown to have a much higher multiple, than that of non-peak perils like Japan windstorm.