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 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.

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Bibliographic Details
Main Authors: Cordella, Tito, Yeyati, Eduardo Levy
Language:English
Published: 2010-07-01
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
https://hdl.handle.net/10986/3861
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