Seasonality in Catastrophe Bonds

Catastrophe bonds are securities that transfer catastrophe risk from (re-)insurers or developing countries to capital markets. Based on secondary market data from 386 seasonality-affected cat bonds, we employ panel data 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 56% of all secondary market fluctuation in seasonality-affected 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.