CATalytic Insurance : The Case of Natural Disasters

Why should countries buy expensive catastrophe insurance? Abstracting from risk aversion or hedging motives, this paper shows that catastrophe insurance may have a catalytic role on external finance. Such effect is particularly strong in those midd...

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Bibliographic Details
Main Authors:	Cordella, Tito, Yeyati, Eduardo Levy
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ACCESS TO CAPITAL ACCESS TO CAPITAL MARKET ACCESS TO CAPITAL MARKETS ACCESS TO CREDIT ACCESS TO INSURANCE ADVERSE SELECTION AGENCY COSTS AMOUNT OF CAPITAL BAILOUTS BOND ISSUANCE BOND MARKET BORROWER BORROWING BORROWING CONSTRAINTS BORROWING COST BORROWING COSTS CAPITAL INVESTMENT CAPITAL MARKETS CAPITAL NEEDS CATASTROPHE BOND CATASTROPHE BONDS COLLATERAL CONSUMPTION SMOOTHING COORDINATION FAILURES COST OF CAPITAL COUPON CREDIT LINE CREDIT MARKETS CREDIT RISK CREDITOR CREDITORS CREDITWORTHINESS DEBT DEBT ISSUANCE DEBT OBLIGATIONS DEFAULT CASE DEFAULT COSTS DEFAULT RISK DEFAULTS DERIVATIVE DEVELOPING COUNTRIES ECONOMIC COSTS ECONOMIC DEVELOPMENT ECONOMIC LOSSES EVENT OF DEFAULT EXCHANGE RATE EXCHANGE RATE REGIME EXPENDITURE EXPOSURE EXTERNAL DEBT EXTERNAL FINANCE FAIR PRICE FINANCIAL CONSTRAINTS FINANCIAL FLOWS FINANCIAL STUDIES GOVERNMENT INTERVENTION INCOME INCOME LEVEL INCOME LEVELS INCOME SMOOTHING INCOMES INDEBTEDNESS INNOVATIONS INSTRUMENT INSURANCE INSURANCE MARKET INSURANCE MARKETS INSURANCE POLICIES INSURANCE POLICY INSURANCE PREMIUM INSURANCE PREMIUMS INSURANCES INSURER INTEREST RATE INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKET INTERNATIONAL ECONOMICS INVESTING INVESTMENT OPPORTUNITIES INVESTMENT OPPORTUNITY ISSUANCE LEVEL OF INDEBTEDNESS LEVY LIQUIDITY LIQUIDITY CRISIS LOAN LOAN AMOUNTS LOW-INCOME COUNTRIES MARKET ACCESS MARKET DISCIPLINE MIDDLE-INCOME COUNTRIES MIDDLE-INCOME COUNTRY MORAL HAZARD MULTILATERAL LENDER MULTILATERAL LENDERS NATURAL DISASTER NATURAL DISASTERS NEGATIVE SHOCK OUTPUT POLITICAL ECONOMY PRIVATE CREDITORS PRIVATE LENDERS PRIVATE LENDING PRIVATE MARKETS PROBABILITY OF DEFAULT PRODUCTIVITY PUBLIC FINANCES RECIPIENT COUNTRY REPAYMENT RETURN RISK AVERSION RISK NEUTRAL RISK OF DEBT RISK OF DEBT REPUDIATION RISK PREMIUM RISK-FREE RATE SECURITIZATION SOVEREIGN DEBT SOVEREIGN DEFAULT VOLATILITY
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100726082621 http://hdl.handle.net/10986/3861

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Summary:	Why should countries buy expensive catastrophe insurance? Abstracting from risk aversion or hedging motives, this paper shows that catastrophe insurance may have a catalytic role on external finance. Such effect is particularly strong in those middle-income countries that face financial constraints when hit by a shock or in its anticipation. Insurance makes defaults less appealing, relaxes countries' borrowing constraint, increases their creditworthiness, and enhances their access to capital markets. Catastrophe lending facilities providing "cheap" reconstruction funds in the aftermath of a natural disaster weaken but do not eliminate the demand for insurance.

CATalytic Insurance : The Case of Natural Disasters

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