Post on 29-Dec-2015
The Government’s Role in Financing The Government’s Role in Financing Disaster Risks to Households and Disaster Risks to Households and BusinessesBusinesses
Authors: J. L. Bayer and R. MechlerAuthors: J. L. Bayer and R. Mechler
QuestionsQuestions
• How do households, farms and other businesses in developing countries cope with disaster losses?
• To what extent do their governments assist with reconstruction and rehabilitation, what we call collective loss sharing?
• To what extent do they engage in risk transfer?
• What types of institutional arrangements determine the extent of collective loss sharing and risk transfer for the private sector? What roles can the government play?
• Under what conditions are disaster risks to households and businesses insurable? What role are advanced computing technologies playing?
• How can private and public responsibility be combined in a national or regional insurance system?
Disaster Loss Financing
Collective LossSharing
For example,•FONDEN calamity fund
Risk Transfer
For example,•Insurance•Micro-insurance•Weather hedges
Loss Sharing and Risk Transfer for the Private SectorLoss Sharing and Risk Transfer for the Private Sector
IIASA: Linneroth-Bayer et al. 2003 Mantaye 2000
Losses reimbursed from insurance and government assistance as a percentage of direct losses
51% 57% 57%44%
61%
84%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Northridge earth
quake '94
Kobe earthquake '95
Umbria earthquake '97
Poland floods '97
Easter floods England '98
Sudan floods '98
Non-reimbursedlosses
State aid
Insuredlosses
Private insurance in low-income countriesPrivate insurance in low-income countries
Insurance uptake is function of income
Need insurance culture and institutions
Expensive
Source: Munich Re 2000
>9,361 3,031-9,360 761-3,030 <760
0%
5%
10%
15%
20%
25%
30%
Insu
red/
tota
l los
ses
Per capita income[USD]
Ratio of insured losses to total losses according to country income groups for period 1985-1999
Insurability of disaster risksInsurability of disaster risks
• Risks are insurable if – they can be identified and quantified and – insurers unrestricted in setting premiums;
• However, insurance may not be available because of– little demand– adverse selection.
Kunreuther (1998)
Risk transfer for households and businesses in developing Risk transfer for households and businesses in developing countries?countries?
Commercial insurance is costly and plagued by moral hazard, therefore it is advisable only if
• It is affordable or there is assistance to very poor households, farms and other businesses
• There are no less costly alternatives • It is tied to loss reduction
Public-private insurance systems for developing Public-private insurance systems for developing countries?countries?
Public-private insurance systems are in place mainly in developed countries– US, France, Norway, New Zealand and Japan
Some important exceptions:– Turkish Catastrophe Insurance Pool(TCIP)– Puerto Rican reserve fund– Proposed for Caribbean
The US National Flood Insurance ProgramThe US National Flood Insurance Program
Credit from US treasuryCredit from US treasury(No taxpayer support)(No taxpayer support)
Public InsurancePublic Insurance•VoluntaryVoluntary•Risk basedRisk based•Community mustCommunity must
qualifyqualify
Extensive post-event Extensive post-event government assistancegovernment assistance
to disaster victimsto disaster victims
The French all-hazards systemThe French all-hazards system
Taxpayer support Taxpayer support If losses exceed capacityIf losses exceed capacity
CCR public reinsuranceCCR public reinsurance
Private insurancePrivate insurance•All hazardsAll hazards•BundledBundled•Flat-rate premiumsFlat-rate premiums with cross subsidieswith cross subsidies
The Turkish Catastrophe Insurance Pool (TCIP)The Turkish Catastrophe Insurance Pool (TCIP)
Main features of the TCIP• Mandatory insurance policies • Privately administered, public fund • Premiums based on risk• Insurance necessary for additional public post-event assistance• Support from the international community
Risk transfer for public assets proposed forRisk transfer for public assets proposed forthe East Caribbean and Hondurasthe East Caribbean and Honduras
Source: Pollner 2000
Micro-insurance and other schemesMicro-insurance and other schemes
Public-private systems not an option for many developing countries Unaffordable Little knowledge of the risks Lack of institutions and insurance culture
Micro-insurance schemes may be an alternative - Disaster insurance in India- Livestock insurance against sudden loss in
Bangladesh Banks Weather hedges One major issue is covariant risk, need for
reinsurance
Loss mitigationLoss mitigation
Loss-sharing or risk-transfer schemes should be coupled with incentives for loss reduction, e.g.,– The US flood insurance program – communities must
qualify;– The French system provides decreasing compensation
with recurring claims;– The Turkish calamity fund reduces premiums for
households that take prescribed measures.
Still role for government with top-down measures