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Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management

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Author Info
Geoffroy Enjolras
Robert Kast
Abstract

This paper proposes a combination of participating and financial contracts in order to hedge catastrophic risk. Assuming unfair policies and the existence of a basis risk, we prove the optimal coverage is realized using: first, a participating contract, which covers the idiosyncratic part of the risk under a variable premium; second, a financial contract, which hedges the systemic part of the risk under a fixed premium. The necessary intermediation of insurance companies in the conception of such contracts is emphasized as well as the impact of unfair premia. From then, potential implications for crop risk management are examined.

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File URL: http://www.lameta.univ-montp1.fr/Fr/Productions/Documents/DR2008-01.pdf
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File Format: application/pdf
File Function: First version, 2008
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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 08-01.

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Length: 35 pages
Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:lam:wpaper:08-01

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Web page: http://www.lameta.univ-montp1.fr/
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  1. Doherty, Neil A & Dionne, Georges, 1993. " Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms," Journal of Risk and Uncertainty, Springer, vol. 6(2), pages 187-203, April.
  2. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  3. Marshall, John M, 1974. "Insurance Theory: Reserves versus Mutuality," Economic Inquiry, Oxford University Press, vol. 12(4), pages 476-92, December.
  4. Arrow, Kenneth J, 1996. "The Theory of Risk-Bearing: Small and Great Risks," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 103-11, May.
  5. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March. [Downloadable!] (restricted)
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