EconPapers    
Economics at your fingertips  
 

Is diversification effective in reducing the systemic risk implied by a market for weather index-based insurance in Spain?

Andrea Martínez-Salgueiro and María-Antonia Tarrazón-Rodón

MPRA Paper from University Library of Munich, Germany

Abstract: This study assesses how effective spatial diversification is in reducing the systemic risk implied by a market for weather index-based insurance in Spain and compares rainfall- and temperature-based policies in terms of systemic risk. Based on historical weather data, daily models which rely on the multivariate normal distribution are applied to derive greater samples. The results show that the Buffer Load, as measured by the Expected Shortfall, decreases up to 67% as the level of aggregation increases. This suggests that the trading area should not be focused on a specific county, but on Spain as a whole. Considering the highest aggregation degree, it is also shown that the diversification effect is significant, of up to 0.35. Finally, it is noted that rainfall insurance is a less-risky alternative as compared to temperature-geared contracts, as it implies lower losses and prices and stronger risk pooling effectiveness. Therefore, we recommend the inclusion of this type of policies in the insurance companies’ portfolio. Finally, although this study focuses on a specific country, the proposed methodology can be easily extrapolated to other geographical areas.

Keywords: weather index-based insurance; spatial diversification; systemic weather risk; risk pooling effectiveness; multivariate normal distribution (search for similar items in EconPapers)
JEL-codes: G30 G32 M10 (search for similar items in EconPapers)
Date: 2020-03-21, Revised 2021-05-19
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/119924/1/MPRA_paper_119924.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119924

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().

 
Page updated 2025-03-19
Handle: RePEc:pra:mprapa:119924