Pooling Catastrophic Mortality Risk in Smallholder Livestock Systems: An ASEAN-5 Sovereign Risk Pool and Catastrophe Bond

Information from the abstract

Single-country livestock-mortality insurance programs in smallholder economies face a structural problem: under regime-switching mortality, the capital needed to stay solvent in a bad year can approach annual premium revenue, so public budgets become the insurer of last resort. This paper designs and prices a regional alternative for the smallholder cattle and buffalo systems of the ASEAN-5 (Thailand, Vietnam, Cambodia, Laos, and Myanmar): a sovereign risk pool with a catastrophe (CAT) bond that transfers the extreme tail to capital markets. A 100,000-iteration Monte Carlo simulates correlated regime-switching mortality, with cross-country dependence structured by epidemiological proximity and calibrated to Food and Agriculture Organization, national-statistics, and World Organisation for Animal Health data. Pooling cuts the 99 percent Value-at-Risk capital requirement by 41 percent relative to the sum of country buffers, a saving of USD 464 million per year, and the saving stays between 25 and 47 percent across plausible correlations. A parametric CAT bond attaching at the 95 percent and detaching at the 99.5 percent pool VaR transfers USD 353 million at an expected loss of 2.2 percent and a spread of 3.6 to 4.1 percent. The Southeast Asia Disaster Risk Insurance Facility provides a ready operational vehicle. For ASEAN agriculture and finance ministries, the practical implication is to build the national mortality-data systems and pooled financing arrangements, through SEADRIF, that would move this cover from design to issuance.

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Related topics: Agricultural risk and resilience · Insurance and Financial Risk Management · Insurance, Mortality, Demography, Risk Management