Alternative risk financing instruments for swine epidemics

Swine epidemics can have very large devastating financial consequences. Governments generally bear the direct losses, such as the value of destroyed animals. Consequential losses, such as the losses resulting from empty buildings and movement standstills, are completely borne by the farmers (and other participants of the production chain) involved. In the Netherlands, as a result of the 1997/1998 epidemic of classical swine fever, the government dramatically changed its risk financing policy, so that farmers now have to pay a significant amount of the direct losses themselves. The goal of this paper is to analyze how this amount can be financed most efficiently. Risk financing instruments studied include a fund, a bank guarantee and an insurance scheme. The paper also considers the opportunities for an insurance scheme for consequential losses. Risk financing instruments are evaluated on the costs and incentives for risk prevention. Costs are analyzed by using a Monte Carlo simulation model. (C) 2002 Elsevier Science Ltd. All rights reserved.