The expected loss is the average loss catastrophe bond investors can expect to transpire over a certain period, divided by the capital sum invested.
In relation to cat bonds the expected loss is typically calculated by a third-party risk modelling entity, this includes RMS, AIR Worldwide, EQECAT, Milliman, and KatRisk.
Leveraging data from the Artemis Deal Directory, Artemis tracks the volume of outstanding catastrophe bond and insurance-linked securities (ILS) risk capital by expected loss.
Expected loss is often used to cite the perceived riskiness of a catastrophe bond transaction, however it does not always capture all of the underlying risk factors related to terms and conditions and is really just a modelled interpretation of the probability of a loss occurring.
For investors though, the multiple of expected loss to coupon interest rate paid can be a useful, albeit simple, metric that implies how well a catastrophe bond is paying comparatively to other similar transactions.