Management strategy for systemics risk within insurance contracts: the case of farm's crop insurance

Martial Phélippé-Guinvarc'h~Jean E. Cordier, France

Because of the strong systemic component of farm risks, the annual Loss Ratio of the insurer will be extremely variable around the balance. Then, the systemic risk component is a major obstacle that limits the agricultural insurance emergence. The aim of paper is to present an approach to overcome such obstacle. This paper approach is mixing the pooling technique usually used to manage insurance contracts and the transfer of the insurer risk to futures markets as used to manage systemic risks. It is applied to a crop yield insurance but can be extended to other insurance contracts such as revenue or crop margin. This approach can also be widen to all insurance policies which included a large systemic risk component correlated with one or more futures (energy futures, weather derivatives. . . ). This original form of securitization was tested using 1972-2002 corn yield data of US State of Illinois and the 1996 & 1997 Chicago Board Of Trade corn yield and price futures data.
Date: 2 June - Time: 10:30 to 12:00 - Room: 251
Theme: 9.A. Various topics