Financial Strategies for Managing the Economic Impacts of Natural Disasters

1. Financial Strategies for Managing the Economic Impacts of Natural Disasters Session 2World Bank Institute J. Bayer and R. Mechler Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  1 1 1 1

2. Global losses are increasing Source: Munich Re 2004 Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  2

3. Impacts of disasters in developed and developing countries Source: Munich Re 2000 Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  3

4. Pre-event disaster risk management cycle Risk Identification and Assessment Catastrophe Risk Risk Control Cycle Mitigation Residual Risk Risk Financing Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  4

5. Risk control mitigation and risk financing Natural natural natural natural Hazard hazard hazard hazard Financial Physical Vulnerability Damage damage damage damage Loss Vulnerability Exposure exposure exposure exposure Mitigation Financial Instruments Incentives Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  5

6. Loss sharing and risk transfer • Public Sector HouseholdsBusinessesAgriculture Informal Sector Family, Neighbors Government Collective Loss Sharing Private Market Risk Transfer Donors and Lenders Domestic and International Assistance International Financial Institutions Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  6

7. Should governments insure? Obligations government Government losses and financing for storm and flood risk Sum financing 1400 1200 1000 financing gaps 800 Losses [USD] 600 400 200 0 1 in 10 years 1 in 50 years 1 in 100 years 1 in 200 years 1 in 500 years Events Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  7

8. Risk transfer for households and businesses in developing 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 Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  8

9. Losses reimbursed from insurance and government Assistance as a percentage of direct losses 100% 90% 80% 44% 51% 57% 57% 61% 70% Non- reimbursed 60% 84% losses 50% Government 40% assistance 30% 20% Insured 10% losses 0% Sudan floods '98 Poland floods '97 Kobe earthquake '95 Umbria earthquake '97 Easter floods England '98 Northridge earthquake '94 IIASA: Linneroth-Bayer et al. 2003 Mantaye 2000 Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  9

10. Public-private insurance systems for developing 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 Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  10

11. Summary • Significant advantages to pro-active risk management • Government’s decision to purchase risk financing instruments contingent on size and existence of financing gap and on costs and benefits of filling that gap • Risk transfer is negligiblefor households and small businesses in developing countries • Governments have three important roles to play: • Direct post-disaster relief • Partners in public-private insurance systems • Subsidizing risk transfer for poor households and smallbusinesses Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems  11