Expected Loss (EL)
The probability-weighted average annual loss for a cat bond or ILS structure. The core pricing input.
Expected loss (EL) is the modelled average annual loss for a reinsurance contract or catastrophe bond, calculated as the probability of attachment multiplied by the average severity once attached. It is the foundational pricing input for ILS instruments.
EL is expressed as a percentage of the notional value. A bond with 1% expected loss is expected to lose, on average, 1% of its principal per year across all possible loss scenarios. The spread offered to investors must exceed the EL for the investment to generate positive expected return.
Multiple return (the ratio of spread to expected loss) is the primary metric ILS investors use to assess relative value. A multiple of 3.0x means the bond pays 3x the expected loss as a premium — a common threshold in the ILS market. EL is modelled by catastrophe modelling firms including RMS, Verisk (AIR), and Karen Clark & Company.
Example usage
“With an EL of 2% and a spread of 6.5%, the bond offers a multiple of 3.25x — considered attractive in the current market.”
Frequently asked questions
What is Expected Loss (EL)?
The probability-weighted average annual loss for a cat bond or ILS structure. The core pricing input. Expected loss (EL) is the modelled average annual loss for a reinsurance contract or catastrophe bond, calculated as the probability of attachment multiplied by the average severity once attached. It is the foundational pricing input for ILS instruments.
How is Expected Loss (EL) used in practice?
With an EL of 2% and a spread of 6.5%, the bond offers a multiple of 3.25x — considered attractive in the current market.
Related terms
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