Strengthening Local Credit Markets Through Lender-Level Index Insurance

45 Pages Posted: 28 Aug 2018 Last revised: 12 Dec 2018

See all articles by Benjamin Collier

Benjamin Collier

Temple University - Risk Management & Insurance & Actuarial Science

Date Written: August 10, 2018

Abstract

This paper considers lender-level index insurance as a means of expanding access to credit in disaster-prone communities. In this approach, the lender transfers the disaster risk of loans in its portfolio by contracting on an observable measure of the catastrophe. I develop and calibrate a dynamic, stochastic model using data from a community lender in Peru that is vulnerable to El Niño-related flooding. The modeled lender can insure against El Niño using an index-based product that is available for purchase by financial intermediaries in Peru. I examine how premium rates, basis risk, and background risk may in influence the lender's insurance decision and credit supply. Overall, the results suggest that lender-level index insurance holds promise for reducing disaster-related credit supply shocks and expanding credit access in vulnerable communities.

Keywords: catastrophe insurance, index insurance, basis risk, background risk, credit shocks

Suggested Citation

Collier, Benjamin, Strengthening Local Credit Markets Through Lender-Level Index Insurance (August 10, 2018). Fox School of Business Research Paper No. 18-045. Available at SSRN: https://ssrn.com/abstract=3233702 or http://dx.doi.org/10.2139/ssrn.3233702

Benjamin Collier (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

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