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