Financial instruments for natural catastrophe risk in the developing world

Natural catastrophe risk models were developed to service the insurance sector, leading to their widespread adoption and advancement in regions with strong insurance penetration. The susceptibility of a region to natural catastrophes is thus often disproportional to the availability of risk models and quantitative measures of hazard and societal vulnerability. What then are countries with low economic development, low insurance penetration, and high-natural catastrophe risk to do? One idea is to adapt existing frameworks to develop innovative and inexpensive financial instruments that support the ex-ante planning and ex-post recovery needs of low and middle-income countries. This presentation will explore both potential and currently implemented alternative risk transfer products (e.g., parametric index derivatives) and provide lessons-learned from structuring financial products for the developing world.