Title: Index insurance and catastrophe bonds for coping with agriculture risk in a multi-region setting
Authors: Christine Oetjen - Technical University of Kaiserslautern (Germany) [presenting]
Abstract: Systemic risk can cause large losses for index crop insurers. Motivated by recent studies on agriculture risk, we explore how regional diversification and securitization using catastrophe bonds can reduce these losses. For this, we consider an equilibrium model to optimize the expected utility from all parties. The model is applied to data from Chinese rice farmers. The statistical analysis shows that regional diversification can improve the insurer's expected utility. However, this effect is smaller and premiums increase when there is a large positive correlation between the yield of two regions. Catastrophe bonds increase the insurer's expected utility and decrease the premiums. With the help of simulations, we will look at the robustness of the model, and we will see that securitization reduces the insurer's risk of extreme losses. Combining both methods, regional diversification and securitization, delivers promising results.