Increasing the Resilience of Financial Intermediaries through Portfolio-Level Insurance against Natural Disasters

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Financial intermediaries (FIs) in developing and emerging economies are poorly equipped to manage natural disasters. These events create losses for FIs, eroding capital reserves and compromising their ability to lend. Portfolio-level insurance against disasters can improve FI management of these events. Microfinance lenders exposed to severe El Niño in Peru are modelled with a decision tool that is developed to enhance lenders' understanding of their exposure. These FIs can now insure against this risk. The analyses suggest that insurance allows these lenders to manage this risk more efficiently and effectively. These risk management improvements can translate into better financial performance, expansion of banking services, reduced volatility in access to credit, and greater access to credit at lower interest rates. 

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Benjamin Collier and Jerry Skees

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27

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