(Bloomberg) -- The risk models that helped drive one of the most lucrative bets of 2023 are increasingly being tested by smaller weather shocks fueled by...
-- The risk models that helped drive one of the most lucrative bets of 2023 are increasingly being tested by smaller weather shocks fueled by climate change .
Last year, cat bonds soared 20% in value, leading hedge funds like Fermat Capital Management to generate their best-ever results. Less specialized investors have started to buy cat bonds and European regulators are even considering allowing retail investors to hold them. Insurers, meanwhile, are issuing new cat bonds at a “record-setting pace,” according to ILS researcher Artemis.Pricing the risk just right is what it’s all about for cat-bond investors, and some of them are brilliant at it.
About 40% of today’s cat-bond market is made up of securities that cover aggregate losses, which is where investors are most likely to feel the fallout of secondary perils, according to Artemis, which tracks unusual insurance strategies. Verisk Analytics Inc., another big catastrophe modeler, says its offering is improving. The insurance-risk specialist updated its model for severe convective storms — a form of secondary peril — in 2022.
“Over the long term, we expect to see a 10% increase in conditions favorable for storms to form,” he said. The secondary perils that are hardest to model are winter storms, such as the five-day freeze that crippled large parts of North America in February 2021, Clark said. To calculate the risk, researchers must assess three “hazard intensity footprints,” including wind, snow and ice, she said.
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