Economics of disaster

1. Economics of disaster Training Course on Factoring Hydro-Climatic Disasters in IWRM

2. INTRODUCTION • Over the last 50 years, there has been a 14-fold increase in the global cost of natural disasters, • Weather-related natural disasters accounting for two-thirds of all losses.

3. OCCURRENCE BY DISASTER TYPE

4. HUMAN IMPACT BY DISASTER TYPES

5. IMPACTS OF DISASTER • Direct impacts.: Occur immediately during or after disaster phenomenon– damage to human and physical assets • impacts on assets • infrastructure • capital • stocks • loss of life

6. INDIRECT IMPACTS • Are perceived after the phenomenon, for a time period that can last from weeks to months, till recuperation occurs • loss of investment • loss of earnings & unemployment, • Increased expenses both private and public • loss of productivity due to death, illness and injuries, • increase in operational cost • cost of alternative provision good and services

7. SECONDARY IMPACTS • Include macroeconomic impacts and longer-term impacts • Repercussions on the economic performance after disaster • May persist for a number of years after the disaster, depending on the characteristics and magnitude

8. SECONDARY IMPACTS • Gross Domestic Product growth • State of public finance e.g. decline in tax revenue • Increases of prices and inflation • Balance of payments, trade deficits and raise in level of indebtedness

9. IMPACTS OF DISASTER • All of these impacts have significant adverse effects on the social and economic development • Employment, housing, factors of production and income • Reallocation of expenditure that occurs following a disaster. • The losses are particularly damaging when depriving countries of resources, which could otherwise be used for economic and social development.

10. IMPACTS OF DISASTER ON CAPITAL FORMATION

11. Risk Reduction Investments • Opportunities for changing levels and forms of vulnerability • Involves the private sector as well as the public sector • Sufficient funding for post disaster reconstruction • Development of appropriate ex-ante risk funding instruments, including reinsurance • Benefits that reduce vulnerability but also support economic growth and development

12. Hazard Floods, drought, etc Elements at risk Capital stock, population Physical vulnerability Susceptibility to physical damage Financial vulnerability /potential financing gaps Ability to finance reconstruction of lost stocks and provide assistance to households and private sector STEP 2 Risk Potential direct losses STEP 1 • Ex-ante instruments • Mitigation • Insurance • Reserve fund • Contingent credit Macro economic impacts Effects of losing capital stock and diverting funds for financing losses STEP 3 Risk Reduction Investment

13. Disaster Risk Transfer • Risk transfer mechanisms shift financial risk from one party to another • The two basic tools for catastrophic risk are; • Insurance • Instruments for spreading risk directly to the capital market • An insurance policy provides cash payouts in the aftermath of a disaster in return of premiums • Insurance companies, in turn, redistribute their risk to global reinsurers

14. Post- and Pre- Disaster Financial Instruments

15. Risk Transfer – Insurance • Increase in public insurance, stimulate more extensive and fuller private coverage. • In developing countries - poor state of domestic insurance markets and a resultant inability to transfer risk to international reinsurance markets. • Undercapitalisation of domestic insurance market developing - minimal capacity to retain exposure to the risk of natural disasters.

16. Risk Transfer – Insurance • Limited catastrophic risk coverage largely reinsured through international markets that raise the cost of insurance •  Less than 1% of total direct losses from natural disasters are insured in developing countries • Insurance coverage tends to be limited to major commercial properties in urban areas

17. Risk Transfer – Insurance • Low-income consumers have less discretionary income, fewer assets to insure, and are expensive for commercial insurers to reach and service. •  Obstacles to coverage of disaster risk include affordability, demand, determination of insurance parameters for verification of loss, and the structure of the insurance industry

18. Water and disaster management • Investment for mitigation of water related disasters double as investments for WRM • Measures include improved basin management, river flow regulation and regular maintenance of water storage facilities and sources • Can be managed as normal part of water resources management and development • Cost of disaster management covered and sustained within the water use charges

19. Discussion Question How can government help create a reserve fund, insure, or purchase other pre-disaster risk-transfer instruments?

20. Lessons Learnt • Cost of disaster make up a growing burden to the poor • Disasters have an adverse effects on development but often overlooked in development programming • Development of disaster insurance provide liquidity immediately following natural disasters • Water resources development investment may reduce disaster risk and offer socio-economic benefits as well