Exploring Inefficiencies in the Primary Catastrophe Bond Market : Focus on the Issuer Effect

Most catastrophe bonds issued in the primary market are sold by the same issuers every year, and within each year. Significant similarities in the bond characteristics are therefore anticipated, which ultimately leads to similarities in pricing for these bond issuers over time. In this paper, using a very rich database with primary catastrophe bond data from June 1997 to March 2020, and proposing a novel random intercept model, the variations in catastrophe bond premiums introduced by the differences between issuers are captured, analysed and found to be significant. The issuer effect appears to be stronger for smaller issuers, based on issue size; for less consistent issuers, based on years of issue in the primary market; and for issuers primarily conducting insurance business, as opposed to reinsurers and other multi-line issuers. Further, we identify the three independent factors that have the largest impact on premiums. Our results give strong evidence that the primary catastrophe bond market remains inefficient, and that factors external to the underlying risk might still impact premiums