Post on 28-Mar-2015
Coping with the financial impact of disasters: a macro-
perspective
Insurance as a method for Disaster Risk Reduction in SEEMacedonia, 23-24 April 2013
Richard Poulter, Researcher of Disaster Risk FinancingThe University of Copenhagen
Contents
1. The macro level perspective: an introduction
2. Disasters and development
3. Disaster Risk Financing: A new paradigm
4. Ex-post and ex-ante financing
5. A weather derivative product
6. Linking risk financing and disaster management
7. The macro perspective – summing up
The disaster burden – fatalities
The disaster burden – damages
Disasters and development
Direct and indirect economic consequences
Type of impact Direct Indirect
Type of loss Fixed capital Cashflow
Economic consequence
Public assetsGovernment Buildings Public Infrastructure
Private assetsIndustrial infrastructureResidential Infrastructure
• Loss of tax revenue• GDP effects• Business interruption• Reallocation of
investments
Information
• Losses easy to calculate
• Response programs evaluated
• Insurers perform loss assessments
• Scare data
• Hidden effects
• Lack of recording
Coping with disasters: governments
In high-income countries, national action but limited economic shock
In low and middle-income countries, governments can pool and share risks, but still suffer from:Exhausted tax basesLimited donor assistance Inability to raise capitalGDP falls in the year of the event or the year afterBudget deficit increasesTrade balance worsens
Disaster Risk Financing:A new paradigm
Reactive (ex post)Proactive (ex-ante)
Government assistance (taxes)Kinship arrangementsDonor assistance
Insurance and reinsurance,catastrophe bond, index insurancecontingent credit, reserve fund
Turkey: Public-private insurance (2000)India+several countries: Index insurance derivatives and microinsurance (since 2004)Colombia: Contingent credit (2005)Mexico: Catastrophe bond (2006)Global: GIIF (2007)Caribbean regional insurance pool (2007)
All with donor involvement
The first step to developing a DRF strategyEstablish event contingent budgeting:
Funds are made available when a certain event occurs
This can lead to clarification over public disaster planning
The private insurance sector can also be used by government as a way to commit to a rules-based system for public expenditure
Timing of funds becoming available is key
Ex-post and ex-ante financing mechanisms
Type of risk
Loss of assets
-households/businesses
Loss of crops/livestock
– farms
Public assets, relief and reconstruction
expenditure
Post-disaster(ex post)
Emergency loans; Money lenders; Public
assistance
sale of productive
assets, food aid
Diversions; Loans from International Financial
Institutions
Pre-disaster (ex ante)
Non-market Kinship arrangements
Voluntary mutual arrangements budget item
Inter-temporal micro-savings food storage
catastrophe reserve funds, contingent
credit
Market-based risk transfer
property and life insurance
crop and livestock insurance
Insurance or catastrophe bonds
Examples of disaster financing mechanisms
Contingent Financing – can be from the World Bank through a Development Policy Loan (DPL) with Catastrophe Deferred Drawdown Option (CAT DDO)
Sovereign Catastrophe Insurance Pool – Europa Re
Catastrophe Bonds – transfer risk to investors by allowing the issuer to not repay the bond principal if a major natural disaster occurs
Weather Derivatives – Provide financing from capital markets via index linked policies
Cashflows for DRF instruments
+
-
Capital Accumulation
Fund Paymenta) Reserve Fund
+
-
Credit Payment
Debt RepaymentAdministrative Costs
b) Contingent Credit
+
-
Insurance Payment
Premium
c) Insurance
Flow of Funds from Three Instruments
Linking risk financing and disaster risk management
Directly lead to adaptation through two channels: i) DRF provides financial compensation post event and
thus reduces the cost of follow-on consequences from slow reactions,
ii) DRF shares pre event risk by removing systemic risk inherent in decision making (i.e. What money should be spent on)
DRF can also indirectly lead to adaptation as the pre event premium provides an incentive to reduce risk (and reduce the premium)
Danger of maladaptation if agents rely on the financial security provided and relax preventive efforts
The macro perspective: summing up
Disasters impact middle-income countries through damages and slowing economic development
There are many hidden costs of disasters such as loss of tax revenue, lower GDP, reallocation of investments and a worsening of the trade balance
There has been a strong move from ex-post to ex-ante financing of disasters
The starting point is the establishment of event-contingent budgeting
Disaster risk financing can strengthen public disaster planning
Several market-based instruments are available, including national and international risk pools