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Reinsuring Climatic Risk Using Optimally Designed Weather Bonds

Author

Listed:
  • Pauline Barrieu

    ([1] Laboratoire de Probabilités, Université de Paris VI, 173 rue du Chevaleret, 75013 Paris, France, e-mail: p.m.barrieu@lse.ac.uk [2] Doctorat HEC, Groupe HEC, 1 rue de la Libération, 78351 Jouy-en-Josas Cédex, France)

  • Nicole El Karoui

    (C.M.A.P., Ecole Polytechnique, 91128 Palaiseau Cédex, France, e-mail: elkaroui@cmapx.polytechnique.fr)

Abstract

The aim of this paper is to determine the optimal structure of a weather bond, i.e. a bond whose coupons depend on the occurence of a weather event. The stress is put more on the structuration than on the simple pricing of the bond. Therefore, instead of looking only at the bond issue, we consider it as a part of a more general transaction, involving three agents: a firm, which wants to be hedged against its weather risk, an investor, which buys the bond and a bank, which has an intermediary key role. Then, we derive the optimal characteristics of the whole transaction. But the bond structure which is obtained, corresponds to a minimal structure: indeed, only the bond optimal price function and its optimal reimbursement level (amount which is paid back when an event occurs) can be determined while there is a degree of freedom in the choice of the optimal coupon. Therefore, this indeterminacy may be interpreted as a marketing tool and it could play an important role in the negotiation process between the issuer and the investor. The Geneva Papers on Risk and Insurance Theory (2002) 27, 87–113. doi:10.1023/A:1021944109402

Suggested Citation

  • Pauline Barrieu & Nicole El Karoui, 2002. "Reinsuring Climatic Risk Using Optimally Designed Weather Bonds," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 27(2), pages 87-113, December.
    • Handle: RePEc:pal:genrir:v:27:y:2002:i:2:p:87-113
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    Citations

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    Cited by:

    1. Zhiwei Shen & Martin Odening, 2013. "Coping with systemic risk in index-based crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 44(1), pages 1-13, January.
    2. Ostap Okhrin & Martin Odening & Wei Xu, 2013. "Systemic Weather Risk and Crop Insurance: The Case of China," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 351-372, June.
    3. Xu, Wei & Odening, Martin & Musshoff, Oliver, 2008. "Optimal Design of Weather Bonds," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6781, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Nobuhiro Nakamura, 2005. "Optimal risk transfer and investment policies based upon stochastic differential utilities," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 12(4), pages 375-403, December.
    5. Geoffroy Enjolras & Robert Kast, 2012. "Combining participating insurance and financial policies," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(1), pages 156-178, May.
    6. Bank, Matthias & Wiesner, Robert, 2011. "Determinants of weather derivatives usage in the Austrian winter tourism industry," Tourism Management, Elsevier, vol. 32(1), pages 62-68.

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