Coping with the financial impact of disasters: a macro-perspective

1. 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

2. Contents • The macro level perspective: an introduction • Disasters and development • Disaster Risk Financing: A new paradigm • Ex-post and ex-ante financing • A weather derivative product • Linking risk financing and disaster management • The macro perspective – summing up

3. The disaster burden – fatalities

4. The disaster burden – damages

5. Disasters and development

6. Direct and indirect economic consequences

7. 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

8. Disaster Risk Financing:A new paradigm Government assistance (taxes) Kinship arrangements Donor assistance Insurance and reinsurance, catastrophe bond, index insurance contingent credit, reserve fund Reactive (ex post) 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 withdonorinvolvement

9. 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

10. Ex-post and ex-ante financing mechanisms

11. 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

12. Cashflows for DRF instruments

16. Linking risk financing and disaster risk management • Directlylead 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 maladaptationif agents rely on the financial security provided and relax preventive efforts

17. The macroperspective: summingup • 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