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

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  • 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.

Suggested Citation

  • Geoffroy Enjolras & Robert Kast, 2008. "Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management," Working Papers 08-01, LAMETA, Universitiy of Montpellier, revised Jan 2008.
  • Handle: RePEc:lam:wpaper:08-01
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    File URL: http://www.lameta.univ-montp1.fr/Documents/DR2008-01.pdf
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    References listed on IDEAS

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    1. Neil A. Doherty & Harris Schlesinger, 2001. "Insurance Contracts and Securitization," CESifo Working Paper Series 559, CESifo Group Munich.
    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.
    3. Arrow, Kenneth J, 1996. "The Theory of Risk-Bearing: Small and Great Risks," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 103-111, May.
    4. 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.
    5. Olivier Mahul, 2001. "Managing Catastrophic Risk Through Insurance and Securitization," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 656-661.
    6. Marshall, John M, 1974. "Insurance Theory: Reserves versus Mutuality," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 476-492, December.
    7. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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    Cited by:

    1. Geoffroy Enjolras & Robert Kast & Patrick Sentis, 2009. "Diversification in Area-Yield Crop Insurance : The Multi Linear Additive Model," Working Papers 09-15, LAMETA, Universitiy of Montpellier, revised Nov 2009.
    2. Robert Kast, 2011. "Managing financial risks due to natural catastrophes," Working Papers hal-00610241, HAL.

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