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CATalytic Insurance: The Case for Natural Disasters

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  • Tito Cordella
  • Eduardo Levy Yeyati

Abstract

Why should developing countries buy expensive catastrophe (CAT) insurance? Abstracting from risk aversion or hedging motives, we find that insurance may have a catalytic role on external finance. Such effect is particularly strong in those low to middle income countries that face financial constraints when hit by a shock or in its anticipation. Insurance makes defaults less likely, thereby relaxing the country's borrowing constraint, and enhancing its access to capital markets. The presence of multilateral lenders that explicitly or implicitly provide inexpensive reconstruction funds in the aftermath of a natural disaster weakens but does not eliminate the demand for catalytic insurance

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  • Tito Cordella & Eduardo Levy Yeyati, 2015. "CATalytic Insurance: The Case for Natural Disasters," CID Working Papers 301, Center for International Development at Harvard University.
    • Handle: RePEc:cid:wpfacu:301
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    1. Yang Dean, 2008. "Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-45, June.
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    Cited by:

    1. Tito Cordella & Eduardo Levy Yeyati, 2015. "CATalytic insurance: the case of natural disasters," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 31(3-4), pages 330-349.
    2. Daniel J. Clarke & Olivier Mahul & Richard Poulter & Tse-Ling Teh, 2017. "Evaluating Sovereign Disaster Risk Finance Strategies: A Framework," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(4), pages 565-584, October.
    3. Clarke,Daniel Jonathan & Wren-Lewis,Liam, 2016. "Solving commitment problems in disaster risk finance," Policy Research Working Paper Series 7720, The World Bank.
    4. Malin Song & Qianqian Du, 2019. "Analysis and exploration of damage-reduction measures for flood disasters in China," Annals of Operations Research, Springer, vol. 283(1), pages 795-810, December.

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    Keywords

    Insurance; Natural Disasters;

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