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Kazuko Ishigaki, Risk Knowledge EconomistUnited Nations Office for Disaster Risk ReductionGeneva, Switzerland
www.unisdr.org
Disaster losses and Economic Consequences:
Toward Comprehensive Risk Finance Strategy
The First Arab Regional Conference
for Disaster Risk Reduction; Aqaba, Jordan
20, March, 2013
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Contents
1. Need for Comprehensive Risk Finance Strategy
2. Risk Management Tools for Private Sector and Government
3. To Prepare for Probable Maximum Disaster
4. Process of evidence-based decision making
5. Conclusion
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The Need for Comprehensive Risk Financing Strategy
Background
1 Increase/intensification of disaster
interruption or slow down to economic growth
e.g. Pakistan GDP growth estimate
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000Real GDP (Average)
without disaster
Average (with disaster, with IDRR)
Average (with disaster, without IDRR)
million $
e.g. Simulation of economic growth and cyclone exposure
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The Need for Comprehensive Risk Financing Strategy
Background
2. Economic growth increase of economic loss in the event of disaster
e.g. Annual Average Losses from cyclonic wind by risk class
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The Need for Comprehensive Risk Financing Strategy
Background
3. Constrained public finance
Fiscal primary balance (% of GDP)
-8
-6
-4
-2
0
2
4
6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
%Countries with advanced economies
Countries with emerging markets
Low-income countries
Source: IMF (2012)
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The Need for Comprehensive Risk Financing Strategy
Background
4. Constrained public investment
- Investment vs consumption
5. Increasing importance of private investment
- Public/Private investment share
OECD 16%: 84%
Developing countries 30-40% : 60-70%
Gross Fixed Capital Formation by sector (% to GDP) in low income countries
0.0
5.0
10.0
15.0
20.0
25.0%
PrivatePublic
Gross Fixed Capital Formation by sector (% of GDP ) in lower middle income countries
0.0
5.0
10.0
15.0
20.0
25.0
30.0
%Private Public
Gross Fixed Capital Formation by sector
(% of GDP) in upper middle income countries
0.0
5.0
10.0
15.0
20.0
25.0
30.0
% Private Public
Government consumption vs investment (% of GDP)
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
%
Invest:Upper middle income Invset:Lower middle income
Invest:Low income Consumption:Upper middle income
Consumption:Lower middle income Consumption:Low income
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The Need for Comprehensive Risk Financing Strategy
Challenges and Options
A: To decrease economic loss in the event of disaster
Invest in disaster risk reduction and preparedness
B: To finance the response/recovery/reconstruction after disaster
Transfer risk and/or pool money
Both require ex-ante financing under tight budget constraint
Need for Comprehensive Risk Financing Strategy
Q1 How much money should be allocated to comprehensive risk financing? (size of total pie)Q2 What is the most efficient and effective allocation of money between option A (risk reduction) and B (risk transfer and risk retention)? (how to divide the pie)
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Risk Management Tools for Business and Household
Risk reduction Risk finance
Risk avoidance Risk mitigation Risk transfer Risk retaining
Business No business in hazard prone area
-Diversifying business location
-Improving resiliency of offices etc
-Crafting BCP
-Buying insurance- Issuing cat bonds
-Setting allowance for contingency
-Establishing captive companies
Household No housing in hazard prone area
Improving resiliency of housings
Buying insurance
Dedicated savings in the event of disaster
Insurance companies
Selecting risks which can be insured
Providing buyers with DRR incentive (e.g. premium setting linked to risk level)
-Buying reinsurance
-Issuing cat bonds
Setting deductible and liability limit
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Government Policy for Comprehensive Risk Finance
Precondition -Risk assessment-Hazard mapping-Information sharing and education
Individual methods
Risk reduction Risk finance
Risk avoidance Risk mitigation Risk transfer Risk retaining
-Land use planning
-Helping relocation
-Establishing early warning system
-Helping evacuation planning
-Infrastructure investment in DRR
-Critical infrastructure protection
-Establishing building code
-Helping BCP
-Providing incentive for insurance
- Providing incentive for Issuing bonds
-Providing incentive for reserve establishment
(1) To affect private corporations and households
Responsibility Sectoral ministries/DM agency Sectoral ministries/ DM agency
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Government Policy for Comprehensive Risk Finance
Precondition -Risk assessment-Hazard mapping-Information sharing and education
Individual methods
Risk reduction Risk finance
Risk avoidance Risk mitigation Risk transfer Risk retaining
-No government offices, important public asset and facility in hazard prone area
-Critical Infrastructure protection
-Response plan
-Government BCP
-Buying insurance
- Issuing bonds
-Establishing reserve
-Contingency credit contract
(2) To assure business continuity of government
Responsibility Sectoral ministries/DM agency Ministry of Finance/DM agency
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To prepare for probable maximum disaster
AAL
Extensive Risk
Intensive Risk Uncertainty: We do not know when the disaster occurs…
Year
PML
PML
Along With adequate annual investment for DRR to cover AAL,it is necessary to
financially prepare for probable maximum disaster
$(loss)
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To prepare for probable maximum disaster
Frequency
Economic loss
Extensive Risk
Intensive Risk
Which sector covers which layer of risk?
First loss Excess loss
NZ (EQC)
Turkey (TCIP)
USA (NFIP)
Government
(the public)
Private
First loss Excess loss
USA (FHCF)
Japan
Private Government
Layer A
Layer B
Layer C
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STEP4: Measure the impact of policy tools on DRR (avoided economic loss)
Process of evidence-based decision making
STEP1 : Produce risk (annual average loss & probable maximum loss) estimate.
STEP2: Choose the return period to cover : political decision
STEP3: Define the expected level of DRR: political decision
Risk
Policy
Public Investment Subsidy Tax Regulation
Reduced Disaster Risk
How much impact on reducing loss?
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STEP4 : how to measure the impact of policy on DRR?Cost Benefit Analysis Disaster Impact Analysis
Preconditions •Past disaster loss data•Vulnerability data•Construction standard
Principle •If the present value of benefit is equal to or more than 1, invest. •The higher C/B ratio, the more preferable the project is.
•Before the project implementation, analyze and measure the disaster impact of the project and/or project impact on disaster.•If the negative impact is measured, include the mitigation cost in the total project cost.
Methodological problems (examples)
•How to assign monetary value to saved life?•How to assign monetary value to avoided loss?
•Same as CBA
Institutional
Problems
(examples)
•Who does the analysis?•Administrative burden
•Same as the CBA•Enforcement
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STEP5: Check the gap between the expected level of DRR and current level of DRR
STEP6: Decide how to do with the gap: implement more DRR or transfer risk? :political decision
Process of evidence-based decision making
Policy
AAL
Investment Regulation etc Transfer Retain
Investment Regulation etc RetainTransfer???
Ideal
Reality
DRR
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STEP5 (related): Main Challenges in DRR Investment Tracking:
Lessons from the recent studies(Main methodological challenges)
• How to count “embedded” DRR investment? (e.g. water management)
• How to separate DRR from reconstruction investment? (e.g. subsidy for housing relocation after disaster)
• How to measure private sector investment, for example, PPP?
• How to measure local government investment? (for example, many project are co-financed by national and local governments)
• How to make the tracking comparable across countries and along time? (e.g. common or comparable definition of DRR, counting method)
• It requires additional administrative burden on government
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• DRR budget of DM Agency: easy to identify
• Main DRR tools embedded in sectoral budgets
• DRR Infrastructure investment
- 100% for DRR (not embedded)
e.g. coastal levees
- x % for DRR (embedded but separable) sub-category of budget item
e.g. emergency train stop equipment for train
- multiple purpose including DRR (completely embedded)
e.g. multi purpose dam, meteorological monitoring
STEP5 (related): Main Challenges in DRR Investment Tracking:
Lessons from the recent studies
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18STEP5 (related): Critical infrastructure: US and UK definition
US UK
Agriculture and Food Food
Defense industrial base
Energy Energy (oil, gas, electricity)
Healthcare and public health Health
National monuments and icons
Banking and finance Financial services
Water Water
Chemical
Commercial facilities
Critical manufacturing
Dams
Emergency services Emergency services
(police, fire, ambulance, coastguard)
Nuclear reactors, materials and waste
IT communications Communications (telecom, post, broadcast)
Postal and shipping
Transportation system Transportation (highways, rail, ports, aviation)
Government facilities including schools Government
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Conclusion: Toward comprehensive risk finance strategy
(1) Constructing information and knowledge base is essentially important.
• Not only hazard risk information but also disaster loss and vulnerability information is necessary as a fundamental base for sound policy making
• Ensure that information leads to implementation: measuring the impact of policy on DRR would bridge the risk information, vulnerability information and government coping capacity information, and facilitate the DRR investment implementation.
(2) Better governance building is necessary.
• In addition to traditional DM agency, MOF and Planning Authority should be key stakeholders.
• Sectoral ministries, especially Ministry which has responsibility for infrastructure building, are also important stakeholders.
• Private sector, especially insurance sector and construction sector, had better be mobilized for cooperation.
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DRR mitigates disaster loss and negative economic consequences
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000Real GDP (Average)
without disaster
Average (with disaster, with IDRR)
Average (with disaster, without IDRR)
million $
Conclusion: Toward comprehensive risk finance strategy
e.g. Pakistan GDP growth estimate
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Thank you
Contact: Kazuko Ishigaki
United Nations Office for Disaster Risk Reduction
Tel: +41 22 917 [email protected]