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Disaster losses and Economic Consequences:
Toward Comprehensive Risk Finance Strategy
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The First Arab Regional Conference
for Disaster Risk Reduction; Aqaba, Jordan
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20, March, 2013
Kazuko Ishigaki, Risk Knowledge Economist
United Nations Office for Disaster Risk Reduction
Geneva, Switzerland
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Contents
1.
Need for Comprehensive Risk Finance Strategy
2.
Risk Management Tools for Private Sector and Government
3.
To Prepare for Probable Maximum Disaster
4.
Process of evidence-based decision making
5.
Conclusion
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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
million ＄
Real GDP （Average）
12,000,000
10,000,000
8,000,000
without disaster
Average (with disaster, with IDRR)
Average (with disaster, without IDRR)
6,000,000
4,000,000
2,000,000
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0
e.g. Simulation of economic growth and cyclone exposure
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The Need for Comprehensive Risk Financing Strategy
Background
2. Economic growth  increase of economic loss in the event of disaster
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e.g. Annual Average Losses from cyclonic wind by risk class
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The Need for Comprehensive Risk Financing Strategy
Background
3. Constrained public finance
Fiscal primary balance (% of GDP)
%
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Countries with advanced economies
Countries with emerging markets
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Low-income countries
2
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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-2
-4
-6
-8
Source: IMF (2012)
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The Need for Comprehensive Risk Financing Strategy
Background
4. Constrained public investment
- Investment vs consumption
Government consumption vs investment (% of GDP)
%
Invest:Upper middle income
Invset:Lower middle income
Invest:Low income
Consumption:Upper middle income
Consumption:Lower middle income
Consumption:Low income
16.0
14.0
12.0
10.0
8.0
6.0
20
11
20
09
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
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4.0
5. Increasing importance of private investment
- Public/Private investment share
OECD 16%: 84%
Developing countries 30-40% : 60-70%
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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
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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)
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Risk Management Tools for Business and Household
Risk reduction
Business
Risk finance
Risk avoidance
Risk mitigation
Risk transfer
Risk retaining
No business in
hazard prone
area
-Diversifying
business location
-Buying
insurance
- Issuing cat
bonds
-Setting
allowance for
contingency
-Improving
resiliency of offices
etc
-Establishing
captive
companies
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-Crafting BCP
Household
No housing in
hazard prone
area
Improving resiliency
of housings
Buying
insurance
Dedicated
savings in the
event of disaster
Insurance
companies
Selecting risks
which can be
insured
Providing buyers
with DRR incentive
(e.g. premium
setting linked to risk
level)
-Buying
reinsurance
Setting
deductible and
liability limit
-Issuing cat
bonds
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Government Policy for Comprehensive Risk Finance
(1) To affect private corporations and households
Precondition
Individual
methods
-Risk assessment
-Hazard mapping
-Information sharing and education
Risk reduction
Risk avoidance
Risk mitigation
Risk transfer
Risk retaining
-Land use
planning
-Infrastructure
investment in DRR
-Providing
incentive for
insurance
-Helping
relocation
-Critical
infrastructure
protection
-Providing
incentive for
reserve
establishment
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-Establishing
early warning
system
-Helping
evacuation
planning
Responsibility
Risk finance
- Providing
incentive for
Issuing bonds
-Establishing
building code
-Helping BCP
Sectoral ministries/DM agency
Sectoral ministries/ DM agency
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Government Policy for Comprehensive Risk Finance
(2) To assure business continuity of government
Precondition
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Individual
methods
-Risk assessment
-Hazard mapping
-Information sharing and education
Risk reduction
Risk finance
Risk avoidance
Risk mitigation
Risk transfer
Risk retaining
-No government
offices, important
public asset and
facility in hazard
prone area
-Critical
Infrastructure
protection
-Buying
insurance
-Establishing
reserve
- Issuing bonds
-Contingency
credit contract
-Response plan
-Government BCP
Responsibility
Sectoral ministries/DM agency
Ministry of Finance/DM agency
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To prepare for probable maximum disaster
$
(loss)
Intensive Risk
PML
PML
Uncertainty: We do not know
when the disaster occurs…
AAL
Extensive Risk
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Year
Along With adequate annual investment for DRR to cover AAL,
it is necessary to
financially prepare for probable maximum disaster
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To prepare for probable maximum disaster
Which sector covers which layer of risk?
Frequency
First loss
Excess loss
Private
Government
Extensive Risk
USA (FHCF)
Japan
Layer A
Intensive Risk
Layer B
Layer C
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Economic loss
NZ (EQC)
Turkey (TCIP)
USA (NFIP)
First loss
Excess loss
Government
(the public)
Private
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Process of evidence-based decision making
STEP1 : Produce risk (annual average loss & probable maximum loss) estimate.
Risk
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)
Reduced Disaster Risk
How much impact on reducing loss?
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Policy
Public Investment
Subsidy
Tax
Regulation
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STEP4 : how to measure the impact of policy on DRR?
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Cost Benefit Analysis
Disaster Impact Analysis
Preconditions
•Past disaster loss data
•Vulnerability data
•Construction standard
Principle
•If the present value of benefit
is equal to or more than 1,
invest.
•The higher C/B ratio, the more
preferable the project is.
Methodological
problems
(examples)
•How to assign monetary value •Same as CBA
to saved life?
•How to assign monetary value
to avoided loss?
Institutional
Problems
(examples)
•Who does the analysis?
•Administrative burden
•Before the project
implementation, analyze and
measure the disaster impact of
the project and/or project
impact on disaster.
•If the negative impact is
measured, include the
mitigation cost in the total
project cost.
•Same as the CBA
•Enforcement
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Process of evidence-based decision making
STEP5: Check the gap between the expected level of DRR
and current level of DRR
Ideal
Reality
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Policy
AAL
Investment
Regulation etc Transfer Retain
DRR
Investment
???
Regulation etc Transfer Retain
STEP6: Decide how to do with the gap: implement more DRR or transfer risk?
:political decision
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STEP5 (related):
Main Challenges in DRR Investment Tracking:
Lessons from the recent studies
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(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
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STEP5 (related):
Main Challenges in DRR Investment Tracking:
Lessons from the recent studies
•
•
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
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- 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): Critical infrastructure: US and UK definition
US
Agriculture and Food
UK
Food
Defense industrial base
Energy
Energy (oil, gas, electricity)
Healthcare and public health
Health
National monuments and icons
Banking and finance
Financial services
Water
Water
Chemical
Commercial facilities
Critical manufacturing
Dams
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Emergency services
Emergency services
(police, fire, ambulance, coastguard)
Nuclear reactors, materials and waste
IT communications
Communications (telecom, post, broadcast)
Postal and shipping
Transportation system
Transportation (highways, rail, ports, aviation)
Government facilities including schools
Government
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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.
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Conclusion: Toward comprehensive risk finance strategy
DRR mitigates disaster loss and negative economic consequences
e.g. Pakistan GDP growth estimate
million ＄
Real GDP （Average）
12,000,000
10,000,000
8,000,000
www.unisdr.org
6,000,000
4,000,000
2,000,000
0
without disaster
Average (with disaster, with IDRR)
Average (with disaster, without IDRR)
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Thank you
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Contact: Kazuko Ishigaki
United Nations Office for Disaster Risk Reduction
Tel: +41 22 917 3460
[email protected]