Attachment Probability
Definition
Attachment probability is the modeled annual probability that losses reach an insurance-linked layer's attachment point, so that investors lose at least some principal. It is estimated by a catastrophe modeling firm from simulated events and the deal's trigger terms, and it is reported in the offering documents together with exhaustion probability and expected loss.
Why it matters
Attachment probability is the plainest measure of how often a position loses money. Spread alone hides it: a high coupon may simply pay for frequent attachment. Comparing it with expected loss and exhaustion probability shows whether losses, when they come, are likely to be partial or total.
Common misconceptions
- •A 2% annual attachment probability is not a 2% chance over the life of a multi-year bond.
- •It is a model output, sensitive to the model, the exposure data and climate assumptions.
- •Attachment probability is not the expected loss; it ignores how much is lost.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Related measures
Exhaustion probability: annual chance of a total loss.
Expected loss: average annual loss as a share of principal, between exhaustion and attachment probability.
Return period: 1 / annual probability (1.48% is about 1 in 68 years).
Questions to ask
Which model and version, and is a climate-conditioned view used?
Is the figure for a single year or averaged over the term?
How sensitive is it to alternative models?
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Where does the number come from?
- From catastrophe models that simulate many possible events and their losses. Swiss Re's 2011 primer explains that the results are summarized in an exceedance probability curve, 'which provides estimates of expected annual losses and the attachment probabilities for different loss levels.'
- What are typical values?
- World Bank sovereign bonds give a range: Chile 2023 1.48%; Jamaica 2024 2.46%; Mexico 2024 from 1.17% (class A earthquake) to 8.30% (class B high-risk earthquake), all annual.
- How does it add up over several years?
- For a constant annual probability p over n years, the chance of at least one attachment is 1 - (1 - p)^n. At Jamaica's 2.46% over its 3.67-year term that is roughly 9%. It happened: Hurricane Melissa triggered a full payout in October 2025.