Seasonality in Catastrophe Bonds and Market-Implied Arrival Frequencies

Journal of Risk and Insurance, Vol. 88, 2021, pp. 785–818

44 Pages Posted: 9 Nov 2018 Last revised: 17 Apr 2023

See all articles by Markus Herrmann

Markus Herrmann

University of Duisburg-Essen - Mercator School of Management

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management

Date Written: August 14, 2020

Abstract

Catastrophe bonds are securities that transfer catastrophe risk from sponsors, which are mostly (re-)insurance companies, to capital markets. Based on secondary market data from 386 seasonality-affected cat bonds, we employ fixed effects regression models to explain seasonality in cat bond spreads. First, we show that the impact of seasonality on spreads depends on fluctuating arrival frequencies, the magnitude of the expected loss and the maturity of the cat bond. Second, we use modeled distributions of arrival frequencies of qualifying events to construct a measure of cat bond seasonality that captures these three effects. Up to 47% of all secondary market fluctuation in single-peril hurricane bonds can be explained through this seasonality measure. Third, we establish a method to deduct market-implied distributions of arrival frequencies from secondary market spreads, reflecting a market-based assessment of catastrophe arrival frequencies.

Keywords: alternative risk transfer, bond spreads, underwriting risk, seasonality, catastrophe arrival frequencies

JEL Classification: G12, G22

Suggested Citation

Herrmann, Markus and Hibbeln, Martin Thomas, Seasonality in Catastrophe Bonds and Market-Implied Arrival Frequencies (August 14, 2020). Journal of Risk and Insurance, Vol. 88, 2021, pp. 785–818, Available at SSRN: https://ssrn.com/abstract=3267824 or http://dx.doi.org/10.2139/ssrn.3267824

Markus Herrmann (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany
+49 203 379-2830 (Phone)

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