Hedging climate change risks in Southern Africa’s agricultural industry using catastrophe bonds

Abstract

The agricultural sector is one of the key economic contributors in Southern Africa. However, agricultural production has been highly affected by climate change risks such as tropical cyclones, floods, droughts, heatwaves, hail, etc., which threaten food and nutrition security, livelihoods and business sustainability. Because of underwriting capacity problems, insurers and reinsurers have failed to provide cover for climate change risks. Also, derivatives have failed to provide a reliable option for hedging such risks. This paper explores the concept of catastrophe bonds (CAT bonds) in providing climate change risk finance. Employing the content analysis, the research shows how CAT bonds can help traditional (re)insurance in providing sufficient hedge against climate change risks and in improving disaster-preparedness, disaster risk-reduction, post-recovery initiatives and sustainable socio-economic agricultural development. The findings show that the adoption of CAT bonds can improve (re)insurers´ underwriting capacity and may enhance agricultural land policies, development, food and nutrition security and employment.

Contribution: The paper shows how CAT bonds can be employed to hedge against climate change risks in agricultural production and to increase (re)insurers´ underwriting capacity. It further discusses the attractiveness of CAT bonds as another investment option for agricultural investors and how to develop and institutionalise a CAT bond market.