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

Geoffroy Enjolras and Robert Kast

No 9268, 101st Seminar, July 5-6, 2007, Berlin Germany from European Association of Agricultural Economists

Abstract: High losses generated by natural catastrophes reduce the availability of insurance. Among the ways to manage risk, the subscriptions of participating and non-participating contracts respectively permit to implement the two major principles in risk allocation: the mutuality and the transfer principles. Decomposing a global risk into its idiosyncratic and systemic components, we show that: the participating contract hedges the individual losses under a variable premium and the systemic risk is covered with a non-participating contract under a fixed premium. Based on Doherty and Schlesinger (2002) and Mahul (2002) approaches, our model replaces the non-participating contract by a financial one based on an index closely correlated to the systemic risk, under a basis risk. Despite the introduction of loading factors on both participating and financial contracts, which increase final loss, we prove that the combination of policies offers an optimal coverage that eliminates the basis risk and provides a sustainable solution for the insurer and the policyholder. We also put in evidence the necessary intermediation of insurance companies in the subscription of such contracts. Therefore, potential implications for crop risk management are studied.

Keywords: Crop Production/Industries; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 24
Date: 2007
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Citations: View citations in EconPapers (2)

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Working Paper: Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaa101:9268

DOI: 10.22004/ag.econ.9268

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