Fiscal Policy and Disaster Risk Financing Integrating disaster risks in fiscal risk assessment and management Olivier Mahul Program Coordinator Disaster Risk Financing and Insurance Program, FCMNB and GFDRR World Bank Climate Public Expenditure and Institutional Review Workshop September 10-12, 2012 Bangkok, Thailand

Economic impact of natural disasters in Asia Pacific Probable Maximum Loss, as % of national GDP ASEAN Member States Annual Average Loss, as % of national GDP Pacific Island Countries Source: WB (2012) Source: PCRAFI (2011)

Including disaster risks into fiscal risk management Sources of fiscal risks – Commodity risk management (e.g., oil price hedging) – Currency risk management – Market risk in debt management Management of contingent liabilities – Infrastructure projects (public- private partnerships) – Legal actions – State guarantees – Natural disaster risks Explicit vs implicit contingent liability of natural disasters – Government owned assets – Low income housing – Small and medium enterprises

Colombia – Fiscal disaster risk assessment World Bank estimates based on MHCP (2011) and ERN (2011). AEL US$490 mil AEL US$490 mil Contingent LiabilityCOP $ MillionsUS$ Millions% of GDP Annual Expected Liability Infrastructure Projects57, Legal Actions40,812,00018, Public Credit Operations122, Natural Disasters691, Natural Disasters Probable Maximum Loss PML 100-yr6,383,8042, PML 250-yr9,669,8434, PML 500-yr12,380,1145, In 2011, GoC assessed its contingent liability to natural disasters, based on potential losses to public assets and private dwellings of low-income populations 2011 National budget ≈ US$ 80 billion; GDP ≈ US$471 billion Limitations: Fiscal shocks highly variable, do not capture indirect losses, disasters require immediate liquidity 100-yr PML US$3 bil 100-yr PML US$3 bil Source: WB DRFI Program (2011)

World Bank Disaster Risk Management Framework

Financial resilience to disasters Based on financial disaster risk assessment and modeling World Bank DRFI Framework

Three-tiered risk layering approach

Matching the funding needs over time

Instruments Indicative Cost (multiplier) Disbursement (months) Amount of funds available Donor support (relief)0-11-6Uncertain Donor support (recovery & reconstruction)0-24-9Uncertain Budget contingencies1-20-9Small Reserves1-20-1Small Budget reallocations1-20-1Small Contingent debt facility (e.g., CAT DDO) Medium Domestic credit (bond issue)1-23-9Medium External credit (e.g. emergency loans, bond issue) Large Parametric insurance2 & up1-2Large ART (e.g., CAT bonds, weather derivatives)2 & up1-2Large Costs and benefits of financial instruments

Understanding Risk for Better (Fiscal) Decision Making Weather and Climate Information and Decision-Support Systems Risk-in-a- Box WCDIS WB is building tools to enable informed decision- making about complex dynamic systems in a changing climate.

DRM and DRFI Probabilistic Risk Modeling DRFI and post- disaster assistance Post disaster budget execution Role of donors Insurance pricing Role of the private sector Index based insurance Regional initiatives