Securitizing peanut production risk with catastrophe (CAT) bonds

James Epperson

No 44512, Faculty Series from University of Georgia, Department of Agricultural and Applied Economics

Abstract: A catastrophe (CAT) bond is designed for peanut production as a means of transferring natural disaster risks from insurance purveyors to the global capital market. The CAT bond so designed is priced using state-level historical yields for peanut production in the southern part of the United States in the State of Georgia. The index triggering the CAT bond contract was based on percent deviation from state average yield. The principal finding of the study is that it appears feasible for crop insurance purveyors to issue insurance-linked securities. CAT bonds can reduce the variance of the loss ratio when issued optimally with regard to the number of bonds and contract specifications. CAT bonds could therefore be used in hedging catastrophic risk effectively in peanut production given that crop insurance purveyors normally seek to minimize the variance of the loss ratio. CAT bonds were found to be feasible as hedging instruments even in the range of normal losses commonly covered by crop insurance and reinsurance.

Keywords: Agricultural Finance; Crop Production/Industries; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 36
Date: 2008-10-31
New Economics Papers: this item is included in nep-agr, nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ugeofs:44512

DOI: 10.22004/ag.econ.44512

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