Determinants of the cat bond spread at issuance

摘要

The contribution at hand is a short summary of a working paper presented by Alexander Braun at the annual meeting of the German Insurance Science Association (DVfVW) in Hannover in March 2012. This working paper contains 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 issued between 1997 and 2011. In order to identify the main determinants of the cat bond spread at issuance, a series of OLS regressions with robust standard errors is run. The respective results indicate that, apart from the expected loss, the covered territory, the sponsor, the reinsurance cycle, and the spreads on comparably rated corporate bonds exhibit a significant impact. Based on these findings, a multifactor pricing model for cat bonds in the primary market is then proposed. This model is applicable across all considered territories and perils, exhibits a stable fit with regard to different subsamples used for calibration, and achieves a higher in-sample and out-of-sample accuracy than several competing specifications that have been introduced in earlier work.