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

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

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.

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Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 68 (2008)
Issue (Month): 1 (September)
Pages: 151-167

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Handle: RePEc:eme:afrpps:v:68:y:2008:i:1:p:151-167
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  1. 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).
  2. 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.
  3. Dercon, Stefan, 1998. "Wealth, risk and activity choice: cattle in Western Tanzania," Journal of Development Economics, Elsevier, vol. 55(1), pages 1-42, February.
  4. 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.
  5. Skees, Jerry & Varangis, Panos & Larson, Donald & Siegel, Paul, 2002. "Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. repec:ags:nc2006:133091 is not listed on IDEAS
  7. 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.
  8. 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.
  9. Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
  10. Rosenzweig, Mark R. & Binswanger, Hans P., 1989. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Bulletins 7455, University of Minnesota, Economic Development Center.
  11. 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.
  12. 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.
  13. David Hofman & Patricia Brukoff, 2006. "Insuring Public Finances Against Natural Disasters; A Survey of Options and Recent Initiatives," IMF Working Papers 06/199, International Monetary Fund.
  14. 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.
  15. Chen, Shaohua & Ravallion, Martin, 2007. "Absolute poverty measures for the developing world, 1981-2004," Policy Research Working Paper Series 4211, The World Bank.
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