ILS: pricing, diversification and illiquidity premium

Some 20 years ago, Morton Lane and John Finn depicted the right price for an insurance risk as one “where the perfume of the premium overcomes the pong of the peril”. While there are numerous fair valuation paradigms in the re/insurance sector, which can vary from option pricing techniques to actuarial loading principles, one aspect remains somewhat identical among all theories, namely that the ‘pong of the peril’ should be quantified by considering an appropriate capturing of the loss distribution of the respective risks.