We normally think of Cats as step function events--everything is fine then a disaster occurs. However, is it possible to manage the death by 1000 cuts type of Cat? This would be one where each individual event is not that big, but at the end of the" day" a Cat has occurred. This paper suggests that it is possible to manage these types of risks.
Agricultural Finance Review, Forthcoming
SOMMARAT CHANTARAT, Cornell University - Department of Economics
CALUM G. TURVEY, Cornell University - Department of Applied Economics and Management
ANDREW G. MUDE, Cornell University - Department of Economics
CHRISTOPHER B. BARRETT, Cornell University - Department of Applied Economics and Management
This paper illustrates how weather derivatives indexed to forecasts of famine can be designed and used by operational agencies and donors to facilitate timely and reliable financing for effective emergency response to climate-based, slow-onset disasters such as drought. We provide a general framework for derivative contracts, especially in the context of index insurance and famine catastrophe bonds, and show how they can be used to complement existing tools and facilities in drought risk financing through a risk layering strategy. We use the case of arid lands of northern Kenya, where rainfall proves a strong predictor of widespread and severe child wasting, to provide a simple empirical illustration of the potential contract designs.