Pricing Catastrophe Bonds in Illiquid Insurance-Linked Markets

Summary

The document concerns technical and practical pricing of insurance-linked securities, especially catastrophe bonds. Its answer characterizes many underlying contracts as excess-of-loss insurance covers, suggesting that actuarial literature on those contracts may be a more relevant starting point than conventional liquid-market derivatives pricing materials.

It cautions that catastrophe-linked contracts trade in non-liquid markets, where risk-neutral or market-consistent pricing may be underdeveloped or may not be meaningful in the usual way. It also notes that much practical information is proprietary and unavailable publicly, while pointing to public analysis from a specialist source. These observations help set expectations about the available literature and the limits of market-based calibration. The answer offers no pricing model, technical method, or empirical evidence, so it serves mainly as context for researchers seeking resources rather than as a guide to valuing a particular security.

Key ideas

• Insurance-linked securities include contracts that can be viewed as excess-of-loss covers.
• Actuarial literature may be useful for understanding the underlying insurance contracts.
• Illiquid catastrophe risk markets limit the development and usefulness of standard market-consistent pricing.
• Practical pricing information is often proprietary, leaving public resources limited.
• The document provides research direction rather than a valuation method.

Tags

# Books/papers on Insurance Derivatives?


# Books/papers on Insurance Derivatives?












I am looking to learn more about insurance-linked securities. I work for an insurance company and am interested in catastrophe risks and cat bonds.

I have a good statistical background and master-level knowledge of financial engineering. I am looking to learn more technical/practical details on the pricing side of these derivatives.

## Answer by g g (score 2)

https://quant.stackexchange.com/a/37449

I think you will find little beyond the standard actuarial literature on the underlying contracts, which are really just XL covers. Since these contracts are written in non-liquid markets risk neutral or market consistent pricing is not highly developed or doesn't even make a lot of sense. In any way most of the information is proprietary and non-public. The only place I know of where you can find public analysis is Morton Lane's site. You can register for free and have a look at their publications.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.