RMS Looks Beyond Catastrophe Risk to Trading Risk

Chris Westfall
Chris Westfall

Risk Management Solutions is stepping up its game in the catastrophe bond market with its new Miu Pricing service that will attempt to offer investors new metrics in measuring performance in the primary and secondary markets.

The service — dubbed Miu Pricing after the firm’s existing catastrophe measurement platform — will provide commentary on bond structures and risk.

“RMS has, up until now, has been about measuring the risk in catastrophe bonds,” says Jinal Shah, head of data products for RMS RiskMarkets. “It’s a natural step to look at the return on those bonds.”

Shah explains that Miu Pricing will focus two traditional areas of bond pricing, including the bond’s Z-spread (spread over reference rate, assuming no catastrophe risk) and its catastrophe-adjusted spread (catastrophe risk premium).

In addition, the service will attempt two additional features, including the measuring the probability of the bond extending and its risk multiple. 

The catastrophe bond issuer has the right to extend the maturity of a bond to account for future development of a loss, and this is important because an investor’s cash may be tied up for up to two years longer than expected, Shah explains.  RMS calculates the probability of extension based on the probability of potential future catastrophic events.

The risk multiple is the ratio of the z-spread to the cat cost.  Shah said this metrics tells investor how many times over they get paid for the expected catastrophic loss – a risk multiple of 5x says that the spread on the deal is five times that required to compensate the investor for expected catastrophe losses.

“We believe the  will be taken up by our existing Miu clients, this will be also be a key service to investors not familiar with the catastrophe bond market to give them the tools they need in a presentable format,” Shah explained.