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Related Experiment Videos

Sovereign cat bonds and infrastructure project financing.

David Croson1, Andreas Richter

  • 1The Wharton School, University of Pennsylvania, Philadelphia 19104-6340, USA.

Risk Analysis : an Official Publication of the Society for Risk Analysis
|July 3, 2003
PubMed
Summary

Catastrophe-linked securities can lower infrastructure funding costs in emerging economies by mitigating disaster risks. This financial tool reduces the need for emergency funding after natural disasters, ensuring project continuity.

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Area of Science:

  • Financial Economics
  • Risk Management
  • Emerging Markets

Background:

  • Infrastructure projects in emerging economies are vulnerable to natural disasters.
  • Unanticipated funding needs post-disaster increase project costs and delays.
  • Existing sovereign contingent capital explanations lack a comprehensive risk management framework.

Purpose of the Study:

  • To explore catastrophe-linked securities for reducing infrastructure project funding costs in emerging economies.
  • To minimize emergency funding requirements following natural disasters.
  • To integrate sovereign contingent capital into a catastrophic risk management framework.

Main Methods:

  • Utilized a multilayer spreadsheet model (Microsoft Excel) for cost-reduction calculations.

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  • Performed numerical comparative statics on contingent-capital financing.
  • Analyzed varying costs of capital, disaster probabilities/consequences, abandonment strategies, and capital commitment timing.

    • Main Results:

    • Quantified overall cost reductions achievable with catastrophe-based financial tools.
    • Identified high-priority applications for catastrophe-linked securities to maximize protection.
    • Demonstrated the value of contingent-capital financing in preventing project disruption.

    Conclusions:

    • Catastrophe-linked securities offer significant benefits for sovereign nations beyond traditional insurance applications.
    • These instruments are well-suited for protecting emerging economy infrastructure from natural disaster risks.
    • Calculated the willingness to pay for these instruments based on project completion value.