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Catastrophe Risk Financing
A Comprehensive Model?
For many countries extreme losses are very
large relative to average losses
Hotspots Report shows 3 regions where this
should automatically be in a CAS- Economic Loss Risks as
a Proportion of GDP per Unit Area
http://www.ldeo.columbia.edu/chrr/research/hotspots/maps.html
If human capital (mortality) is considered South Asia
enters the rapid onset picture – African drought is an
ongoing economic and social disaster
Pattern
• International response – relief aid flows in
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quickly (not all useful)
A large number of organizations become
involved – there may be coordination
The initial high powered capacity leaves
Assessments are completed – programs agreed
Work begins on reconstruction – but is never
completed – can be ad hoc
Entrepreneurs may take advantage of the poor
(e.g. beachside property)
Funding tends to be ad hoc and ex
post
• Often there is no national, state or local risk
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management plan in place
If there is it is likely to assume funding sources –
donors (often tied), temporary taxes, reallocated
capital spending
Some countries have catastrophe line items in
their annual budgets – but based on avergaes
rather than extreme events, and can be
captured.
Benson - 2003
• Cross sectional study – 115 countries,
1960 – 1993
• Some selection bias but inference that
countries with higher disaster incidence
tended to have lower growth
• Counterevidence tends to be based on
short term GDP effects and have a geo
hazards selection bias
Development implication of not having
a risk management strategy
• Underinvestment
• Infrastructure degradation
• The poor are differentially and adversely
affected – particularly in rural areas
There is now a meta model that could
integrate all of this
Key issues for TA and Funding
• Establishing a viable response capacity ex ante
• Building incentives for mitigation investment
• Getting essential infrastructure into place
immediately after the disaster (e.g. helicopters
and clean water equipment needs almost
universal)
• Developing financial capacity to deal with long
term reconstruction
Arguments against ex ante funding
• Moral hazard – countries will not engage in
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mitigation – evidence?
Not a permissible use of state funds – legal not
economic
Ex post funding will always be there – not the
actual experience after the shouting dies down
Cost – are short term officials the right ones to
make the trade offs?
Arguments for ex ante funding
• Forces risk assessment – can encourage
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mitigation effort
Less moral hazard than assumed ex post funding
Creates immediate liquidity post disaster
Work + money = better psychological outcome
for the populace
The money goes where the losses are – less
scope for wastage/ corruption etc
Lower post disaster costs
States with state sponsored ex ante
mechanisms
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Norway
France
Indonesia
South Korea
Japan
US (California/ Florida/ Flood Insurance Scheme)
Taiwan
New Zealand
Switzerland
Turkey
Mexico (crop)
Ex ante mechanisms
• Insurance/ reinsurance
• Pools/specialist reinsurers
• Capital market instruments – Cat Bonds,
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weather insurance
Contingent facilities – debt forgiveness,
contingent debt
Where do they fit?
• Residual item after mitigation and other
funding sources
• As an incentive to support mitigation/
response capacity building
When does contingent debt make
sense ?
• When it is very cheap relative to insurance
• When the frequency of events is relatively
high – savings/ credit modality
• When viable insurance markets (or
proxies) cannot be formed
• When governments have legal or cognitive
problems with insurance
Our Ideal product – Contingent Hazard
Recovery & Management Loan
(CHaRM)
• Adjustment characteristics
• Rapidly disbursing
• Conditionalities based on risk management capacity being built
Response capacity in place
 Post disaster national accounting system in place
 Risk management institution in place and active
 Etc
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Not in CAS envelope – but post disaster adjustment capacity
Deferred front end fee
Low commitment fee
Link to risk management TA
Long repayment and grace periods
Modalities
Donors
Government
Risk
Management
Agency
Response
Capacity,
Mitigation
Incentives
DDO/ERL
Post-disaster
Subsidized Loan
and Grant Facility
Lifeline infrastructure, the
poor and disadvantaged
Private Reinsurance/ Cat
Bond Markets
Cat.
Pool
Insurers, Property
Lenders
Formal housing
owners, small
business
DDO
Building a response capacity is not
Rocket Science – Lisbon 1775
• Population 275,000, alluvial soils, masonry
buildings
• Earthquake followed by tsunami foillowed
by fire
Response:
• The King retreated to the country
• The Chief Minister became coordinator
His actions
First:
• Bury the dead (at sea) and feed the living
(initially the job of the army)
• Looters convicted and hung on the spot
• Secured in situ supplies, instituted pass
system, ensured tenants rights
After immediate needs dealt with
Planned rebuilding:
• Sought architectural and engineering advice – invited out of the box
thinking - Lisbon changed from a royal to a mercantile city
• Introduced earthquake proof building standards – built on the
rubble, intriduced metal and timber cross ties (gaiola) –tested the
results
• Wall design to inhibit the spread of fire
• Prefabricated outside city to speed reconstruction
• Funding- the Church took over food supply and temporary housing,
4% tax imposed on imports (other taxes temporarily suspended),
active efforts to revive economy
• Time to complete – 100 years!!