An Empirical Investigation of the Dependence between Catastrophe Events and the Performance of Various Asset Classes

For insurance and reinsurance companies primarily involved in the Catastrophe business, the dependence between losses from catastrophe events and the returns on their asset portfolio can significantly impact their risk capital calculation. This dependence is also of relevance to capital market investors involved in Insurance Linked Securities (ILS) funds. In this paper, we draw on more than 60 years of data to investigate the dependence between insured and economic losses from catastrophe events and the relative performance of several asset classes, commodities, and economic indices in the US. We also look at the association between catastrophes and equities for selected catastrophe prone countries around the world. For US equities, our investigation suggests two correlation effects: one corresponding to the lowest 80th percentile of catastrophe losses, and another corresponding to the highest 20th percentile.

Keywords: Enterprise Risk Management, Economic Capital Model, Dependence, Correlations, Assets, Catastrophes, Insurance Linked Securities