Proposal for Securitization of Systemic Risk in Slovak Agriculture

Abstract

The article proposes insurance of agricultural crop represented by hectare yield in Slovakia. There is a systemic risk, for which the fund from collected premiums may not be sufficient for the insurer. It therefore seeks reinsurance in the reinsurance market. If it is exhausted, the reinsurer transfers the unbearable part of the risk to the capital market by means of ILS instruments, namely CAT bonds. The indicator of a loss event is the value of the loss index. The diverse geographical relief of Slovakia causes different conditions for farmers to grow crops, in our article we took wheat. Different hectare yields are achieved due to different geographical conditions in the same production process. This causes a balance distortion between the amount of the same premium and the amount of the risk borne and the existence of a basis risk. Due to its elimination, we will divide growers according to cultivated land into agricultural production areas, where the achieved hectare yields are registered, and we will evaluate CAT bond for each of them. The risk is then transferred to the capital market. For a securitization process to be feasible, the tradability of a CAT bond is essential.