Financing Mechanisms for Pro-active Disaster Risk Management for the Public Sector

1. Financing Mechanisms for Pro-active Disaster Risk Management for the Public Sector Session 2World Bank InstituteInternational Institute of Applied System AnalysisJ. L. Bayer and R. Mechler Financial Strategies for Managing the Economic Impacts of Natural Disasters 1 1

2. Honduras After Hurricane Mitch Fall 1998 Source: World Bank 2002 Financial Strategies for Managing the Economic Impacts of Natural Disasters

3. Transportation Bottlenecks AfterMitch Before After Source: World Bank 1999 Financial Strategies for Managing the Economic Impacts of Natural Disasters

4. ODA Drives Recovery in Honduras After Mitch Sources: World Bank 2002 Financial Strategies for Managing the Economic Impacts of Natural Disasters

5. Pre-event Disaster Risk Management Cycle Risk Identification and Assessment Catastrophe Risk Risk Control Cycle Mitigation Residual Risk Risk Financing Financial Strategies for Managing the Economic Impacts of Natural Disasters

6. Components of a Probabilistic `Catastrophe´ Risk Model Hazard Module Exposure Module Vulnerability Module Damage Module Loss Module Financial Strategies for Managing the Economic Impacts of Natural Disasters

7. Risk Identification and Assessment Financial Strategies for Managing the Economic Impacts of Natural Disasters

8. Natural hazard Physical financial loss damage vulnerability vulnerability Exposure Mitigation financial financial instruments instruments Incentives Risk Control Mitigation and RiskFinancing Financial Strategies for Managing the Economic Impacts of Natural Disasters

9. How Does the Government Pay for Relief and Reconstruction? Post-disaster • Budget & loan diversions • Taxes • Borrowing (domestic and international) • Donor assistance Pre-disaster • Catastrophe reserve fund • Insurance • Catastrophe bonds • Contingent credit Financial Strategies for Managing the Economic Impacts of Natural Disasters

10. India: Financing Gap After Gujarat Earthquake 2001 Source: World Bank 2003. Financial Strategies for Managing the Economic Impacts of Natural Disasters

11. Risk Identification and AssessmentAssessment of Financing Gap Financial Strategies for Managing the Economic Impacts of Natural Disasters

12. Ex-ante Instruments for Risk Financing Flow of Funds from Three Instruments Capital Accumulation + a) Reserve Fund Fund Payment - b) Contingent Credit Credit Payment + Administrative Costs Debt Repayment - c) Insurance + Insurance Payment Premium - Financial Strategies for Managing the Economic Impacts of Natural Disasters

13. Should Governments Insure? • Three questions should be answered to determine whether a government should insure its infrastructure and other post-disaster liabilities: • Is there a potential financing gap? • What are the costs of insurance and other pre-disaster financial instruments? • What are the benefits of insurance and other pre-disaster financial instruments? Financial Strategies for Managing the Economic Impacts of Natural Disasters

14. Costs and Benefits of Different Risk Financing Options Financial Strategies for Managing the Economic Impacts of Natural Disasters

15. The Economic Growth-stability Tradeoff Financial Strategies for Managing the Economic Impacts of Natural Disasters

16. Building a culture of prevention is not easy. While the costs of prevention have to be paid in the present,its benefits lie in a distant future (Annan 1999). Important Messages • Costs are deterministic, benefits are not, probabilistic context • Natural disasters are not average events, need to account properly for low-probability, high consequence haracteristics. Financial Strategies for Managing the Economic Impacts of Natural Disasters