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

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

Abstract

This article considers the potential for securitizing index-based insurance products that transfer weather and natural disaster risks from lower income countries. It begins with a brief overview explaining why markets for natural disaster risks are important, yet often missing, in lower income countries and a review of some recent activities using index-based weather insurance. Next, we describe 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 principle amounts would be small relative to the existing CAT bond market.

Suggested Citation

  • Jerry R. Skees & Barry J. Barnett & Anne G. Murphy, 2008. "Creating insurance markets for natural disaster risk in lower income countries: the potential role for securitization," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 151-167, May.
  • Handle: RePEc:eme:afrpps:v:68:y:2008:i:1:p:151-167
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    References listed on IDEAS

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    5. 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).
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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. Sommarat Chantarat, 2015. "Index-based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Countries," PIER Discussion Papers 10., Puey Ungphakorn Institute for Economic Research, revised Nov 2015.
    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. Xiaofeng Cao & Ostap Okhrin & Martin Odening & Matthias Ritter, 2015. "Modelling spatio-temporal variability of temperature," Computational Statistics, Springer, vol. 30(3), pages 745-766, September.
    5. Wenzel, Lars & Wolf, André, 2013. "Protection against major catastrophes: An economic perspective," HWWI Research Papers 137, Hamburg Institute of International Economics (HWWI).
    6. Mirović, Vera & Bolesnikov, Dragana, 2013. "Application Of Asset Securitization In Financing Agriculture In Serbia," Economics of Agriculture, Institute of Agricultural Economics, vol. 60(3).

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