Optimum Investments to Mitigate Catastrophic Risk: Application to Food Industry Firms

Abstract

The incidence of food security breaches has been on the rise over the past decade. The goal of this paper is to devise an optimum investment strategy by food companies (retailers and manufacturers) to mitigate exposure to catastrophic risks. To do this, we develop and estimate a simple analytical model, using probability measures for catastrophic risks associated with food, from our prior research, together with the results of a "Benchmarking and Assessment Survey" of food companies. The limitations on the availability of catastrophic risk insurance and their high level of deductibility, together with the one-time nature of the alternative risk-mitigating investments suggest that such investments should be undertaken whether or not catastrophic risk insurance is available, particularly since these investments have a large impact on risk financing. Such investments may protect long term reputations and brand ratings in addition to mitigating potential catastrophic losses.