Session 2 World Bank Institute J. Bayer and R. Mechler Financial Strategies for Managing the Economic Impacts of Natural Disasters Session 2 World Bank Institute J. Bayer and R. Mechler Comprehensive Disaster Risk Management Framework National Disaster Management Systems  1 1 1

Global losses are increasing Source: Munich Re 2004 Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Impacts of disasters in developed and developing countries Source: Munich Re 2000 Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Pre-event disaster risk management cycle Risk Identification and Assessment Catastrophe Risk Risk Control Cycle Mitigation Residual Risk Risk Financing Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Risk control mitigation and risk financing Natural natural natural natural Hazard hazard hazard hazard Financial Physical Damage damage damage damage Vulnerability Loss Vulnerability Exposure exposure exposure exposure Mitigation Financial Instruments Incentives Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Loss sharing and risk transfer Victims Public Sector Households Businesses Agriculture Informal sector Family, neighbors Government Collective loss sharing Private Market Risk Transfer Donors and Lenders Domestic and International assistance International Financial Institutions Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Should governments insure? Government losses and financing Obligations government for storm and flood risk Sum financing 1400 1200 1000 financing gaps 800 Losses [USD] 600 400 200 1 in 10 years 1 in 50 years 1 in 100 years 1 in 200 years 1 in 500 years Events Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Risk transfer for households and businesses in developing countries? Commercial insurance is costly and plagued by moral hazard, therefore it is advisable only if It is affordable or there is assistance to very poor households, farms and other businesses There are no less costly alternatives It is tied to loss reduction Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Losses reimbursed from insurance and government Assistance as a percentage of direct losses 100% 90% 80% 44% 51% 57% 57% 70% 61% Non- reimbursed 60% 84% losses 50% Government 40% assistance 30% 20% Insured 10% losses 0% Poland floods '97 Sudan floods '98 Kobe earthquake '95 Umbria earthquake '97 Northridge earthquake '94 Easter floods England '98 IIASA: Linneroth-Bayer et al. 2003 Mantaye 2000 Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Public-private insurance systems for developing countries? Public-private insurance systems are in place mainly in developed countries US, France, Norway, New Zealand and Japan Some important exceptions: Turkish Catastrophe Insurance Pool(TCIP) Puerto Rican reserve fund Proposed for Caribbean Comprehensive Disaster Risk Management Framework National Disaster Management Systems 

Summary Significant advantages to pro-active risk management Government’s decision to purchase risk financing instruments contingent on size and existence of financing gap and on costs and benefits of filling that gap Risk transfer is negligible for households and small businesses in developing countries Governments have three important roles to play: Direct post-disaster relief Partners in public-private insurance systems Subsidizing risk transfer for poor households and small businesses Comprehensive Disaster Risk Management Framework National Disaster Management Systems