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

This paper by Richard Poulter discusses the macroeconomic impact of disasters, emphasizing the necessity of disaster risk financing. Focusing on Southeast Europe, particularly Macedonia, it explores innovative financial mechanisms such as weather derivatives, catastrophe bonds, and index insurance that can enhance disaster management and recovery. By identifying the economic burdens of disasters—both direct and indirect—the research advocates shifting from reactive ex-post financing to proactive ex-ante models to improve resilience and public budgeting frameworks.

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

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  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

  13. 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

  14. 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

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