Agricultural Risk Transfer

CHAPTER 11Risk Transfer to Capital Markets

11.1 INTRODUCTION

Alternative capital providers such as hedge funds, pension funds, sovereign wealth funds, mutual funds and specialised catastrophe-oriented funds are of increasing importance in providing capital for insurance risks. In 2016, a capital of US$81 billion, or 12% of the global reinsurance capacity, was provided by alternative capital markets. While mainly used by (re)insurers to expand the basis of protection of highly correlated events such as natural catastrophes, government entities and state funds increasingly engage in non-traditional risk transfer.

While traditional reinsurance capacity is available in all markets and placements are often oversubscribed, insurance-linked securities (ILS) offer interesting opportunities for the agricultural sector, particularly when conventional solutions are not available due to systemic risks and concentrations of high exposures. Catastrophe bonds can play a vital role for governments in transferring peak risks in low- and middle-income countries that are highly dependent on agriculture and have little developed insurance and finance markets that can absorb systemic losses in an undiversified economy. Recent efforts to develop catastrophe risk models for agricultural risk classes support non-traditional risk transfer.

This chapter first introduces the main terminologies of capital market risk transfer and provides an overview of the current market. The main ILS products, including ...