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1. Disaster losses and Economic Consequences: Toward Comprehensive Risk Finance Strategy Kazuko Ishigaki, Risk Knowledge EconomistUnited Nations Office for Disaster Risk ReductionGeneva, Switzerland The First Arab Regional Conference for Disaster Risk Reduction; Aqaba, Jordan 20, March, 2013 www.unisdr.org

2. Contents Need for Comprehensive Risk Finance Strategy Risk Management Tools for Private Sector and Government To Prepare for Probable Maximum Disaster Process of evidence-based decision making Conclusion

3. The Need for Comprehensive Risk Financing Strategy Background 1 Increase/intensification of disaster  interruption or slow down to economic growth e.g. Pakistan GDP growth estimate e.g. Simulation of economic growth and cyclone exposure

4. The Need for Comprehensive Risk Financing Strategy Background 2. Economic growth  increase of economic loss in the event of disaster e.g. Annual Average Losses from cyclonic wind by risk class

5. The Need for Comprehensive Risk Financing Strategy Background 3. Constrained public finance Source: IMF (2012)

6. The Need for Comprehensive Risk Financing Strategy Background 4. Constrained public investment - Investment vs consumption 5. Increasing importance of private investment - Public/Private investment share OECD 16%: 84% Developing countries 30-40% : 60-70%

7. The Need for Comprehensive Risk Financing Strategy Challenges and Options A: To decrease economic loss in the event of disaster Invest in disaster risk reduction and preparedness B: To finance the response/recovery/reconstruction after disaster Transfer risk and/or pool money Both require ex-ante financing under tight budget constraint  Need for Comprehensive Risk Financing Strategy Q1 How much money should be allocated to comprehensive risk financing? (size of total pie) Q2 What is the most efficient and effective allocation of money between option A (risk reduction) and B (risk transfer and risk retention)? (how to divide the pie)

8. Risk Management Tools for Business and Household

9. Government Policy for Comprehensive Risk Finance (1) To affect private corporations and households

10. Government Policy for Comprehensive Risk Finance (2) To assure business continuity of government

11. To prepare for probable maximum disaster PML $ (loss) PML Uncertainty: We do not know when the disaster occurs… Intensive Risk AAL Extensive Risk Year Along With adequate annual investment for DRR to cover AAL, it is necessary to financially prepare for probable maximum disaster

12. To prepare for probable maximum disaster Which sector covers which layer of risk? Frequency Extensive Risk Layer A Intensive Risk Layer B Layer C Economic loss

13. Process of evidence-based decision making Risk STEP1 : Produce risk (annual average loss & probable maximum loss) estimate. STEP2: Choose the return period to cover : political decision STEP3: Define the expected level of DRR: political decision STEP4: Measure the impact of policy tools on DRR (avoided economic loss) Policy Reduced Disaster Risk How much impact on reducing loss? Public Investment Subsidy Tax Regulation

14. STEP4 : how to measure the impact of policy on DRR?

15. Process of evidence-based decision making Policy STEP5: Check the gap between the expected level of DRR and current level of DRR STEP6: Decide how to do with the gap: implement more DRR or transfer risk? :political decision Ideal AAL Reality Investment Regulation etc Transfer Retain DRR Investment ??? Regulation etc Transfer Retain

16. STEP5 (related): Main Challenges in DRR Investment Tracking:Lessons from the recent studies (Main methodological challenges) How to count “embedded” DRR investment? (e.g. water management) How to separate DRR from reconstruction investment? (e.g. subsidy for housing relocation after disaster) How to measure private sector investment, for example, PPP? How to measure local government investment? (for example, many project are co-financed by national and local governments) How to make the tracking comparable across countries and along time? (e.g. common or comparable definition of DRR, counting method) It requires additional administrative burden on government

17. DRR budget of DM Agency: easy to identify Main DRR tools embedded in sectoral budgets DRR Infrastructure investment - 100% for DRR (not embedded) e.g. coastal levees - x % for DRR (embedded but separable) sub-category of budget item e.g. emergency train stop equipment for train - multiple purpose including DRR (completely embedded) e.g. multi purpose dam, meteorological monitoring STEP5 (related): Main Challenges in DRR Investment Tracking:Lessons from the recent studies

18. STEP5 (related): Critical infrastructure: US and UK definition

19. Conclusion: Toward comprehensive risk finance strategy (1) Constructing information and knowledge base is essentially important. Not only hazard risk information but also disaster loss and vulnerability information is necessary as a fundamental base for sound policy making Ensure that information leads to implementation: measuring the impact of policy on DRR would bridge the risk information, vulnerability information and government coping capacity information, and facilitate the DRR investment implementation. (2) Better governance building is necessary. In addition to traditional DM agency, MOF and Planning Authority should be key stakeholders. Sectoral ministries, especially Ministry which has responsibility for infrastructure building, are also important stakeholders. Private sector, especially insurance sector and construction sector, had better be mobilized for cooperation.

20. DRR mitigates disaster loss and negative economic consequences Conclusion: Toward comprehensive risk finance strategy e.g. Pakistan GDP growth estimate

21. Thank you Contact: Kazuko Ishigaki United Nations Office for Disaster Risk Reduction Tel: +41 22 917 3460ishigaki@un.org