Budgeting for Disasters - • Natural human causes ... Tsunami – $4.5 billion ... incentives for mitigation of specific hazards

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<ul><li><p>BudgetingforDisasters</p><p>MarvinPhaupandCharlotteKirschner</p><p>TheGeorgeWashingtonUniversity</p><p>30th AnnualMeetingoftheWorkingPartyofSeniorBudgetOfficials</p><p>OECDConferenceCenter,Paris45June2009</p><p>1</p></li><li><p>Outline</p><p>I. Findings</p><p>II. Disasters&amp;TheirCosts</p><p>III. PolicyResponses</p><p>IV. ContributionofEffectiveBudgeting</p><p>V. InternationalPractices&amp;Experiences</p><p>VI. TentativeConclusions</p><p>2</p></li><li><p>3</p><p>I.Findings</p><p> Governmentpoliciescanimprovewellbeinginfaceofdisasters Mostlybyeffectingchangebefore loss Butpotentiallyharmfulpoliciesexist</p><p> Effectivebudgetingcanhelp Key:Exanterecognition offuturecosts</p><p> Manycountrieshavepracticesconsistentwithexantebudgeting,butinsufficientinformationtoconfirmexanterecognitionofcosts</p></li><li><p>4</p><p>II.Disasters</p><p> Natural&amp;humancauses Lowfrequency,highconsequenceevents</p><p> Emergencies,disasters&amp;catastrophes Size&amp;timinguncertain</p><p> 5yearplusevents</p></li><li><p>II.CostofDisasters</p><p> Significantlossofresources&amp;productivecapacity</p><p> Threattolivingstandards&amp;lifetimeconsumptionplans</p><p> Lowfrequencyincreasescost Unlikelyeventoccursoften Expectedvalueofannualcostgreaterthanzero</p><p>5</p></li><li><p>II.CostsofDisaster</p><p> 1995KobeEarthquake Propertydamagedestimated$100billion($1995)</p><p> 2005HurricaneKatrina AsofApril2006,Bushadministrationsought$105 billionforrepairs&amp;reconstruction</p><p> CostliestnaturaldisasterinUShistory December2004IndianOceanEarthquake&amp;Tsunami $4.5billioninIndonesia</p><p>6</p></li><li><p>Hurricane Katrina</p><p>Kobe earthquake</p><p>1975 1980 1985 1990 1995 2000 2005 2008Year</p><p>EMDAT: The OFDA/CRED International Disaster Database www.emdat.be Universit Catholique de Louvain, Brussels Belgium</p><p>II.EstimatedDamageCausedbyNaturalDisasters19752008</p><p>7</p></li><li><p>8</p><p>III.PolicyObjectives</p><p> Maintainpostdisasterlivingstandards Providereliefandpostrecoveryassistance Mitigation Increasenationalsaving&amp;capitalformation</p><p> Efficient&amp;equitableallocationdecisions Useallavailableinformation Fairnesswithin&amp;acrosscohorts</p></li><li><p>III.OurCriticalAssumptions Governmentshavelongtermdeficittargetbasedonintergenerationalequity,independentofexpectedcostsofdisasters</p><p> Nootherbudgetprocessassumptions Exantebudgetingonlyaffectsnumbers&amp;tradeoffs</p><p> Consistentwithmanypractices: Insurance Contingencyfunds Ornoneofabove</p></li><li><p>III.BudgetaryAlternatives</p><p> ExPost Focusonresponseafterevent</p><p> ExAnte Focusondisasterthreatbeforeevent</p><p> Ideallybothareused Dangerofthemiddleway</p><p> Exantedisclosure</p><p>10</p></li><li><p>III.ExPostPolicy</p><p> Focusonrelief&amp;recovery Authorizeemergencyassistanceprogramsincludingaidforreconstruction</p><p> Deferdecisionsonexactamounts&amp;typesofassistanceuntileventoccurs</p><p> Someattentiontomitigation Rebuildingconvenient,efficientopportunity</p><p>11</p></li><li><p>III.ExPostBudgeting</p><p> Fewcoststorecognizeuntilresourceoutflow Emergencyplanning/training/stockpiles Newbenefitsatzerobudgetcost</p><p> Nofiscalincentivetomitigateorsave Responsetobefinanced&amp;budgetedafterevent Oftenwithsupplementalappropriationsthatrequirefewtradeoffs</p><p>12</p></li><li><p>III.ExPostEconomicEffects</p><p> Financingprovidedbyredistributiontovictimsfromothers</p><p> Moralhazard Privatemitigation&amp;precautionarysavingincentivesdecline</p><p> Comparedwithnopolicy Totaleventlossesincrease;capitallower Largerdeclineinincome&amp;consumption</p><p>13</p></li><li><p>III.ExAntePolicy</p><p> Focusondisasterplanningbeforeevent Precommittolimitsontypes&amp;amountsofassistance Disciplinesresponse Clarifiespublicprivateroles</p><p> Createpublic&amp;privateincentivestomitigaterisks&amp;tosave(offsetmoralhazard)</p><p>14</p></li><li><p>III.ExAnteBudgeting</p><p> Recognizethepresentvalueofgovernmentsexpectedcost,annualizedforbudgetperiod,beforetheeventoccurs</p><p> Increasedbenefitshasbudgetcostnow Beforeloss,governmentconsumesless,savesmore</p><p> Recognizesavingsfrompoliciesexpectedtoreducelosses</p><p>15</p></li><li><p>III.ExAnteEconomicEffects</p><p> Shiftsresourcesfromgoodtimesforwardtobadtimes;frombeforelosstoafter Reducelowvalueconsumption,increasehighvalue</p><p> Moresaving,investmentinmitigation Comparedwithexpostbudgeting</p><p> Fewertotallosses Morepostlosscapital Higherpostlossincome/consumption</p><p>16</p></li><li><p>III.ExAnteAdvantages</p><p> Lowerpostlosstaxes,fewerdistortions Smootherconsumption,higherwelfare Moreefficientchoices</p><p> Public&amp;private Reduceduncertaintyaboutpolicy</p><p> Noneedtosacrificepostdisasterassistance</p><p>17</p></li><li><p>III.ExAnteDisadvantages</p><p> Highcostofsaving&amp;mitigation Lowerconsumptionnow Disastermaynotoccur:benefitsuncertain</p><p> Concernaboutpoliticalmisuseofprelossfunding</p><p> Higheranalyticalrequirementsforestimatingcostthanwaitinguntillossoccurs</p><p> Mayreducedonorcontributions</p><p>18</p></li><li><p>19</p><p>IV.EffectiveExAnteBudgeting Keyfeature:recognitionofexpectedcost</p><p> Recognitionmeansresourcesallocated; Notavailableforotheruses Somethingmustbegivenup</p><p> Secondaryfeature:recognitionofcostpermitsrecognitionofsaving Creditsformitigation&amp;otheractivities</p><p> Riskbasedpricingofinsurance&amp;deductibles Landuserestrictions Regulation</p></li><li><p>IV.DisclosureisNotBudgeting</p><p> Disclosure,notrecognition,ofexpectedcostexanteisafavoredmiddleway Intragovernmentaltransfer Supplementarybudgetinformation Textnotesorprojections</p><p>20</p></li><li><p>IV.EffectsofDisclosure</p><p> Thebudgetshows Nopublicresourceuse Notradeoffsrequired Nocreditforsavings</p><p> Fauxsaving PerhapsnoworsethanExPost Seemssubstantive:opaque Samebudgeteffectsasexpost</p><p>21</p></li><li><p>22</p><p>IV.BudgetEffectofThreeExamplesExAnte Ex Post Disclosure</p><p>Expenditures tooffbudgetbeforeloss</p><p>100 0 0</p><p>Revenues increase&amp;spendingdecreasesbeforelosss</p><p>100 0 0</p><p>Change inpublicsavingbeforeloss</p><p>100 0 0</p><p>Expected postlosstaxes</p><p>0 100 100</p><p>Postloss income Higherthanalternatives</p><p>Belowexante Belowexante</p></li><li><p>IV.ExAnteBudgeting&amp;CloseSubstitutes</p><p> Publicpurchaseofinsurance Mandateprivateinsurancepurchase Publicoffbudgetinsuranceorreinsurance Contingencyfunds Noteeffectsofeachon</p><p> Mitigationincentives Politicalresistancetofairpremiums Saving Uncertainty</p><p>23</p></li><li><p>V.InternationalPractices</p><p>24</p><p>NoRisk LowRisk MediumRisk</p><p>HighRisk</p><p>Earthquake 2 5 1 2</p><p>HurricaneTyphoon</p><p>2 3 2 3</p><p>Tsunami 4 4 1 1</p><p>VolcanicEruption 6 2 1 1</p><p>WildFires 0 4 4 2</p><p>Flood 0 0 5 5</p><p>Blizzard 1 3 3 3</p><p> 10of27CountriesRespondedtoSurvey</p></li><li><p>V.GovernmentsRoleinDisasterRelief&amp;Recovery</p><p> 9providecashgrantstoindividual&amp;businesses;4provideloans</p><p> 8providecashgrantstolowerlevelsofgovernment;3provideloans</p><p> 6providetaxadvantagestodisastervictims 8provideemergencyservices 5stockpilereliefsupplies</p><p>25</p></li><li><p>V.BudgetingforDisasterRelief&amp;Recovery</p><p> 8budgetexpost 2budgetatexpectedactuarialcosts</p><p> Unusedfundsareavailableforlaterrelief&amp;recoveryusein1country(exante)</p><p> Unusedfundsexpireorrevertbacktotreasuryin1country(disclosure/expost)</p><p> All10countriesusesupplementalappropriationstofundrelief&amp;recoverycostsinexcessofbudgetedamounts</p><p>26</p></li><li><p>V.BudgetingforMitigationEachBudget</p><p>CycleInCapitalBudget</p><p>Lower LevelofGovernmentResponsible</p><p>ActivityNotinBudget</p><p>Research &amp;Development</p><p>9 1 4 0</p><p>EarlyWarning 6 2 4 1</p><p>RegulationEnforcement</p><p>6 0 5 1</p><p>LandConservation 7 2 4 0</p><p>ResponseCommunicationsSystems</p><p>7 2 4 0</p><p>Training&amp;Exercising 9 1 5 0</p><p>27</p></li><li><p>V.GovernmentPoliciesforInsurance 5of10countriesinvolvedwithdisasterinsurance</p><p>28</p><p>France Japan Norway Switzerland Turkey</p><p>Mandate privateinsurersprovidecoveragefornaturaldisasters</p><p>No No Yes Yes No</p><p>Mandatepurchaseofinsurance</p><p>No No NoYes,insomecantons</p><p>Yes,inmunicipalities</p><p>Governmentprovidesinsurance</p><p>Yes No Yes Yes Yes</p><p>Governmentprovidesreinsuranceorguarantee</p><p>Yes Yes No No No</p></li><li><p>V.InsurableHazards</p><p> Eachof7hazardsinsurabletovaryingdegrees All5countriesinsureagainstearthquake Franceonlycountrywithallhazardsapproachtoinsurance</p><p> Correlationbetweenperceptionofrisk&amp;provisionofinsurance R=.37forallcountries R=.53afterremoving1countrythatinsuresforallhazards</p><p>29</p></li><li><p>V.GovernmentInsuranceTendstoIgnoreMoralHazard</p><p> Only2countriescaptheamountofcoveragebelow100%ofvalueofsomeatriskproperties,butnomandatorydeductibles</p><p> Anotherhasmandatorydeductibles,butnocaps</p><p> Other2countrieshavenocaps&amp;nomandatorydeductibles</p><p> Premiumsforinsuranceareadjustedforriskin2countries</p><p>30</p></li><li><p>V.ContingencyFunds Contingenciesmorebroadlydefinedtoincludealldifficulttopredicteventsthatimposesubstantialcostsongovernments(terrorevents,war,economiccrisis,epidemics,etc.)</p><p> Contingencyfundsusefulforincreasinggovernmentsavings,butprovideweakincentivesformitigationofspecifichazards</p><p> 4of10countriesreportuseofgeneralcontingencyfunds</p></li><li><p>V.ElementsofExAnteBudgeting</p><p> Closerexaminationofthreecountriesthatappeartouseexantebudgetingforearthquakesandothernaturaldisaster Japan NewZealand Turkey</p><p>32</p></li><li><p>V.Japan</p><p> Highriskofearthquake&amp;volcaniceruption Approximately5%ofnationalbudgetfordisasterrelief,recovery,&amp;mitigation</p><p> Residentialinsurancemaybepurchasedthroughprivateinsurersasanadditiontofireinsurance</p><p> Riskadjustedpremiumssettocovercosts</p><p>33</p></li><li><p>V.Japan:SharedResponsibilityofDisasterCosts</p><p> PrivateinsurancecompaniespasspremiumsontoJapaneseEarthquakeReinsuranceCompany</p><p> JERresponsibleforpayingclaimsupto110billionyenperincident</p><p> Claimsgreaterthan110billionyenresponsibilitysharedwithincreasingportiontogovernment</p><p> Governmentmaintainsreserveaccounttocoveritsportion 1.1trillionyeninFY2008</p><p>34</p></li><li><p>V.ExAnteBudgetinginJapan</p><p> Recognizescostsofrelief&amp;recoveryexante Fundspublicmitigationtoreducelosses Limitsoffsettingeffectsofmoralhazardthroughcapsoninsurance</p><p> Achievespoolingofindependentlossesnationally&amp;diversificationofresourceswithtaxes&amp;internationalinvestments</p><p>35</p></li><li><p>V.NewZealand 11%chanceofmagnitude7.5earthquakealongWellingtonfaultlineinnext50years</p><p> EarthquakeCommission,aCrownEntity,providesresidentialpropertyinsuranceforearthquakes&amp;othernaturaldisasters</p><p> Automaticcoveragewhenresidencespurchasecoverageforfire</p><p> CaponallowedcoveragefromEQC,buttopupinsurancemaybepurchasedfromprivateinsurers</p><p>36</p></li><li><p>V.NewZealand Flatratepremiums&amp;lowdeductible Premiumscollected&amp;setasideinNaturalDisasterFund</p><p> Priorto2001,Fundinvestedinfixedinterestsecurities,suchasgovernmentstock</p><p> After2001,investedininternationalsecuritiestoensureassetsheldoutsideofaffectedarea Investmentinglobalequitieslimitedto2733% Remainderinvestedingovernmentstockorcash</p><p>37</p></li><li><p>V.NewZealand</p><p> EQCminimizesownriskbypurchasingreinsurancefrominternationalreinsurers</p><p> StateprovidesultimateunlimitedguaranteeifcatastropheexceedsthecapacityofNaturalDisasterFundandreinsurance Eitherthroughgrantorloan Inexchangeforguarantee,EQCpaysunderwritingfeetogovernment</p><p>38</p></li><li><p>V.Turkey</p><p> 98%ofTurkeyspopulationlivesinareawithseismicactivity</p><p> Asresultofcostsfrom1999earthquake,governmentmadeinsurancecompulsory AdministeredbyTurkishCatastropheInsurancePool(TCIP)</p><p> Publicprivatepartnershipbetweengovernment,WorldBank&amp;internationalreinsurers</p><p>39</p></li><li><p>V.Turkey</p><p> Earthquakeinsurancemandatoryforresidentialbuildingswithinmunicipalboundaries Commercialbuildings&amp;buildingsoutsidemunicipalboundariesmaypurchasevoluntarily</p><p> Homeownersmustshowproofofinsurancetostartaccountforpublicutilities</p><p> Maximumcoveragelimitadjustedannually Homeownersmaypurchaseadditionalcoveragethroughprivateinsurers</p><p>40</p></li><li><p>V.Turkey</p><p> Premiumsriskbased Proximitytoseismicarea,typeofconstruction&amp;sizeofbuilding</p><p> 2%deductiblepaidbypolicyholders Revenueskeptinsegregatedaccounts&amp;investedaccordingtoguidelinessetbyboardofdirectors</p><p>41</p></li><li><p>V.EffectiveExAnteBudgeting?Japan New Zealand Turkey</p><p>Exante budgetingforrelief&amp;recovery?</p><p>Yes Yes Yes</p><p>Who providesinsurance?</p><p>Private insurers Government Publicprivatepartnership</p><p>Insurancemandatory? No Yes,automaticwithpurchaseoffireinsurance</p><p>Yes, forresidentialbuildingsinmunicipalities</p><p>Riskbasedpricing? Yes No Yes</p><p>Limit onamountofcoverage?</p><p>Yes Yes, butoptionalincreasecoverage</p><p>Yes,butoptionalincrease coverage</p><p>Government reinsurerorguarantee?</p><p>Yes,butcapped Yes Yes</p><p>42</p></li><li><p>VI.TentativeConclusions Possibleforgovernmenttorealizethebenefitsofexantebudgetingfordisasters</p><p> Manycountriesappeartodosoby: Directlyprovidinginsurance Supportingprivateinsurancethroughreinsuranceorguarantees</p><p> Attemptingtoincreasenationalsavingsthroughgeneralcontingencyfunds</p><p> 7of10respondingOECDcountriesuseoneormoreofthesemethods</p><p> Additionalresearchrequired 43</p></li><li><p>Contact</p><p>MarvinPhaup</p><p>mphaup@gwu.edu</p><p>0112025311862</p><p>CharlotteKirschner</p><p>ckirschn@gwmail.gwu.edu</p><p>0112029945170</p><p>44</p><p>mailto:mphaup@gwu.edumailto:ckirschn@gwmail.gwu.edu</p><p>Budgeting for Disasters OutlineI. FindingsII. DisastersII. Cost of DisastersII. Costs of DisasterSlide Number 7III. Policy ObjectivesIII. Our Critical Assumptions III. Budgetary AlternativesIII. Ex Post PolicyIII. Ex Post Budgeting III. Ex Post Economic EffectsIII. Ex Ante PolicyIII. Ex Ante BudgetingIII. Ex Ante Economic Effects III. Ex Ante AdvantagesIII. Ex Ante DisadvantagesIV. Effective Ex Ante BudgetingIV. Disclosure is Not BudgetingIV. Effects of DisclosureIV. Budget Effect of Three ExamplesIV. Ex Ante Budgeting &amp; Close SubstitutesV. International PracticesV. Governments Role in Disaster Relief &amp; Recovery V. Budgeting for Disaster Relief &amp; RecoveryV. Budgeting for MitigationV. Government Policies for InsuranceV. Insurable HazardsV. Government Insurance Tends to Ignore Moral HazardV. Contingency FundsV. Elements of Ex Ante BudgetingV. JapanV. Japan: Shared Responsibility of Disaster CostsV. Ex Ante Budgeting in JapanV. New ZealandV. New ZealandV. New ZealandV. TurkeyV. TurkeyV. TurkeyV. Effective Ex Ante Budgeting?VI. Tentative ConclusionsContact</p></li></ul>

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