Creating Insurance Markets for Natural Disaster Risk in Lower Income Countries: The Potential Role for Securitization

This paper examines the potential for securitizing index-based insurance products that transfer weather and natural disaster risks from lower income countries (LICs). Many LICs are highly exposed to losses caused by extreme weather events and natural disasters. Yet, they do not have insurance markets for transferring these risks. The paper:

• Explores new approaches to creating insurance markets for natural disaster risk in LICs;
• Builds on the financing structure of the Mongolian Index-based Livestock Insurance (IBLI) pilot;
• Examines potential for marketing tranches of risk to investors. 

Higher income countries use catastrophe (CAT) bonds to allow equity investors to pre-finance losses from major catastrophes. The paper extends the concept of CAT bonds to introduce micro-CAT bonds that could be marketed to institutional and socially responsible investors. Micro-CAT bonds could crowd-in a capital market so that the more developed and much larger reinsurance market would become significantly involved. They also provide the opportunity to get venture capital into pilot tests that use index-based insurance to transfer extreme weather and natural disaster risk in LICs.