Coping with the financial
impact of disasters: a
macro-perspective
Insurance as a method for Disaster Risk Reduction in SEE
Macedonia, 23-24 April 2013
Richard Poulter, Researcher of Disaster Risk Financing
The University of Copenhagen
Contents
1. The macro level perspective: an introduction
2. Disasters and development
3. Disaster Risk Financing: A new paradigm
4. Ex-post and ex-ante financing
5. A weather derivative product
6. Linking risk financing and disaster management
7. The macro perspective – summing up
The disaster burden –
fatalities
The disaster burden –
damages
Disasters and development
Direct and indirect economic
consequences
Type of impact
Type of loss
Economic
consequence
Information
Direct
Indirect
Fixed capital
Cashflow
Public assets
Government Buildings
Public Infrastructure
Private assets
Industrial infrastructure
Residential Infrastructure
• Losses easy to calculate
• Response programs
evaluated
• Insurers perform loss
assessments
•
•
•
•
Loss of tax revenue
GDP effects
Business interruption
Reallocation of
investments
• Scare data
• Hidden effects
• Lack of recording
Coping with disasters:
governments
 In high-income countries, national action but limited
economic shock
 In low and middle-income countries, governments can pool
and share risks, but still suffer from:
 Exhausted tax bases
 Limited donor assistance
 Inability to raise capital
 GDP falls in the year of the event or the year after
 Budget deficit increases
 Trade balance worsens
Disaster Risk Financing:
A new paradigm
Government assistance (taxes)
Kinship arrangements
Donor assistance
Reactive (ex post)
Insurance and reinsurance,
catastrophe bond, index insurance
contingent credit, reserve fund
Proactive (ex-ante)
Turkey: Public-private insurance (2000)
India+several countries: Index insurance derivatives and
microinsurance (since 2004)
Colombia: Contingent credit (2005)
Mexico: Catastrophe bond (2006)
Global: GIIF (2007)
Caribbean regional insurance pool (2007)
All with donor involvement
The first step to developing a
DRF strategy
 Establish event contingent budgeting: Funds are
made available when a certain event occurs
 This can lead to clarification over public disaster
planning
 The private insurance sector can also be used by
government as a way to commit to a rules-based
system for public expenditure
 Timing of funds becoming available is key
Ex-post and ex-ante financing
mechanisms
Type of risk
Loss of assets
households/businesse
s
Loss of
crops/livestock
– farms
Public assets, relief and
reconstruction
expenditure
Post-disaster
(ex post)
Emergency loans;
Money lenders; Public
assistance
sale of productive
assets, food aid
Diversions; Loans from
International Financial
Institutions
Non-market
Kinship arrangements
Voluntary mutual
arrangements
budget item
Intertemporal
micro-savings
food storage
catastrophe reserve funds,
contingent credit
Marketbased risk
transfer
property and life
insurance
crop and livestock
insurance
Insurance or catastrophe
bonds
Pre-disaster
(ex ante)
Examples of disaster
financing mechanisms
 Contingent Financing – can be from the World Bank
through a Development Policy Loan (DPL) with
Catastrophe Deferred Drawdown Option (CAT DDO)
 Sovereign Catastrophe Insurance Pool – Europa Re
 Catastrophe Bonds – transfer risk to investors by
allowing the issuer to not repay the bond principal if a
major natural disaster occurs
 Weather Derivatives – Provide financing from capital
markets via index linked policies
Cashflows for DRF
instruments
Linking risk financing and
disaster risk management
 Directly lead to adaptation through two channels:
 i) DRF provides financial compensation post event and thus
reduces the cost of follow-on consequences from slow
reactions,
 ii) DRF shares pre event risk by removing systemic risk
inherent in decision making (i.e. What money should be spent
on)
 DRF can also indirectly lead to adaptation as the pre event
premium provides an incentive to reduce risk (and reduce the
premium)
 Danger of maladaptation if agents rely on the financial security
provided and relax preventive efforts
The macro perspective:
summing up
 Disasters impact middle-income countries through damages and slowing
economic development
 There are many hidden costs of disasters such as loss of tax revenue, lower
GDP, reallocation of investments and a worsening of the trade balance
 There has been a strong move from ex-post to ex-ante financing of disasters
 The starting point is the establishment of event-contingent budgeting
 Disaster risk financing can strengthen public disaster planning
 Several market-based instruments are available, including national and
international risk pools