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Creating insurance markets for natural disaster risk in lower income countries: the potential role for securitization

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  • Skees, Jerry R.
  • Barnett, Barry J.
  • Murphy, Anne G.

Abstract

This paper considers the potential for securitizing index-based insurance products that transfer weather and natural disaster risks from lower income countries. The paper begins with a brief overview of why markets for natural disaster risks are important in lower income countries and a review of some recent activities using index-based weather insurance. Next, the paper explains how natural disaster risks are handled in higher income countries. These examples along with the example of an innovative index-based livestock insurance pilot project in Mongolia illustrate how layers, or tranches, of natural disaster risk can be financed during the product development phase by creating structures similar to the Special Purpose Vehicles used in catastrophe bond, mortgage bond, and the emerging microfinance bond markets. We refer to these investment alternatives as micro-CAT bonds since the principal amounts would be small relative to the existing CAT bond market.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 101st Seminar, July 5-6, 2007, Berlin Germany with number 9272.

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Date of creation: 2007
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Handle: RePEc:ags:eaa101:9272

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Related research

Keywords: Catastrophe risk; index insurance; weather risks; socially responsible investing; reinsurance; Risk and Uncertainty;

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References

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  1. John G. McPeak & Christopher B. Barrett, 2001. "Differential Risk Exposure and Stochastic Poverty Traps Among East African Pastoralists," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 674-679.
  2. repec:ags:nc2006:133091 is not listed on IDEAS
  3. Rosenzweig, Mark R. & Binswanger, Hans P., 1992. "Wealth, weather risk, and the composition and profitability of agricultural investments," Policy Research Working Paper Series 1055, The World Bank.
  4. Skees, Jerry & Varangis, Panos & Larson, Donald & Siegel, Paul, 2002. "Can financial markets be tapped to help poor people cope with weather risks ?," Policy Research Working Paper Series 2812, The World Bank.
  5. David Hofman & Patricia Brukoff, 2006. "Insuring Public Finances Against Natural Disasters," IMF Working Papers 06/199, International Monetary Fund.
  6. Dercon, Stefan, 1998. "Wealth, risk and activity choice: cattle in Western Tanzania," Journal of Development Economics, Elsevier, vol. 55(1), pages 1-42, February.
  7. Neil A. Doherty, 1997. "Financial Innovation in the Management of Catastrophe Risk," Center for Financial Institutions Working Papers 98-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
  9. Barnett, Barry J. & Barrett, Christopher B. & Skees, Jerry R., 2008. "Poverty Traps and Index-Based Risk Transfer Products," World Development, Elsevier, vol. 36(10), pages 1766-1785, October.
  10. Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
  11. Neil A. Doherty, 1997. "Financial Innovation in the Management of Catastrophe Risk," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(3), pages 84-95.
  12. Jerry R. Skees & Barry J. Barnett, 2006. "Enhancing microfinance using index-based risk-transfer products," Agricultural Finance Review, Emerald Group Publishing, vol. 66(2), pages 235-250, September.
  13. Michael Carter & Christopher Barrett, 2006. "The economics of poverty traps and persistent poverty: An asset-based approach," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 178-199.
  14. Goes, Anne & Skees, Jerry R., 2003. "Financing Natural Disaster Risk Using Charity Contributions And Ex Ante Index Insurance," 2003 Annual meeting, July 27-30, Montreal, Canada 22188, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  15. Chen, Shaohua & Ravallion, Martin, 2007. "Absolute poverty measures for the developing world, 1981-2004," Policy Research Working Paper Series 4211, The World Bank.
  16. repec:idb:brikps:30738 is not listed on IDEAS
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Cited by:
  1. 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).
  2. 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, 01.
  3. Mirović, Vera & Bolesnikov, Dragana, 2013. "Application Of Asset Securitization In Financing Agriculture In Serbia," Economics of Agriculture, Institute of Agricultural Economics, vol. 60(3).
  4. Wenzel, Lars & Wolf, André, 2013. "Protection against major catastrophes: An economic perspective," HWWI Research Papers 137, Hamburg Institute of International Economics (HWWI).

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