financial strategies for managing the economic impacts of natural disasters

11
1 Comprehensive Disaster Risk Management Framework National Disaster Management Systems 1 Financial Strategies for Managing the Economic Impacts of Natural Disasters Session 2 World Bank Institute J. Bayer and R. Mechler

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Financial Strategies for Managing the Economic Impacts of Natural Disasters. Session 2 World Bank Institute J. Bayer and R. Mechler. 1. 1. 1. 1. Global losses are increasing. Source: Munich Re 2004. 2. Impacts of disasters in developed and developing countries. Source: Munich Re 2000. - PowerPoint PPT Presentation

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Page 1: Financial Strategies for Managing the Economic Impacts of Natural Disasters

1Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

1111

Financial Strategies for Managing the Economic

Impacts of Natural Disasters

Session 2World Bank Institute

J. Bayer and R. Mechler

Page 2: Financial Strategies for Managing the Economic Impacts of Natural Disasters

2Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

2

Global losses are increasing

Source: Munich Re 2004

Page 3: Financial Strategies for Managing the Economic Impacts of Natural Disasters

3Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

3

Impacts of disasters in developed and developing countries

Source: Munich Re 2000

High income Middle income Low income

5

45

187

-

2040

6080

100

120140

160180

200

Fatalities per eventMajor natural disasters 1985-1999

Per capita income country groups

2.5%

5.0%

13.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

High income Middle income Low income

Direct economic losses as % GDP Major natural disasters 1985-1999

Per capita income country groups

Page 4: Financial Strategies for Managing the Economic Impacts of Natural Disasters

4Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

4

Pre-event disaster risk management cycle

Risk Control

Catastrophe Risk

Mitigation

Risk Financing

Residual Risk

Cycle

Risk Identification and Assessment

Page 5: Financial Strategies for Managing the Economic Impacts of Natural Disasters

5Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

5

Risk control mitigation and risk financing

Incentives

naturalhazard

exposure

damage

naturalhazard

exposure

damage

Mitigation Financial Instruments

naturalhazard

exposure

damage

NaturalHazard

Exposure

PhysicalVulnerability Damage

FinancialVulnerability Loss

Page 6: Financial Strategies for Managing the Economic Impacts of Natural Disasters

6Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

6

Loss sharing and risk transfer

HouseholdsBusinessesAgriculture

Private Market

Risk Transfer

Donors and Lenders Domestic and International

Assistance International Financial Institutions

GovernmentCollective Loss

Sharing

Public Sector

Informal SectorFamily, Neighbors

Page 7: Financial Strategies for Managing the Economic Impacts of Natural Disasters

7Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

7

Should governments insure?

1 in 10 years

1 in 50 years

1 in 100 years

1 in 200 years

1 in 500 years

0

200

400

600

800

1000

1200

1400

Loss

es [U

SD

]

Events

Government losses and financing for storm and flood risk

Obligations government

Sum financing

fin

an

cin

g g

aps

Page 8: Financial Strategies for Managing the Economic Impacts of Natural Disasters

8Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

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

Page 9: Financial Strategies for Managing the Economic Impacts of Natural Disasters

9Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

9

Losses reimbursed from insurance and government

Assistance as a percentage of direct losses

51% 57% 57%44%

61%

84%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Northrid

ge earthquake '9

4

Kobe earthquake '9

5

Umbria earth

quake '97

Poland floods '97

Easter fl

oods England '9

8

Sudan floods '98

Non-reimbursedlosses

Governmentassistance

Insuredlosses

IIASA: Linneroth-Bayer et al. 2003 Mantaye 2000

Page 10: Financial Strategies for Managing the Economic Impacts of Natural Disasters

10Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

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

Page 11: Financial Strategies for Managing the Economic Impacts of Natural Disasters

11Comprehensive Disaster Risk Management FrameworkNational Disaster Management Systems 

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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 negligible for 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