Economics of disaster

Training Course on Factoring Hydro-Climatic Disasters in IWRM

GOAL AND LEARNING OBJECTIVES

Goal The goal of this module is to establish the implications of

hydro-climatic disasters on economic development and the necessary disaster risk investment for mitigation.

 Learning Objectives

Participants are expected to be able to: Appreciate disaster risk reduction (DRR) as a national and

local priority; Elaborate the significance of disasters in economic

development; and Discuss possible ways for disaster risk transfer and financing. 

INTRODUCTION

Over the last 50 years, there has been a 14-fold increase in the global cost of natural disasters. In 2007, the cost of the world’s natural disasters was estimated at US$62.5 billion

Weather-related natural disasters accounting for two-thirds of all losses.

OCCURRENCE BY DISASTER TYPEOCCURRENCE BY DISASTER TYPE

HUMAN IMPACT BY DISASTER TYPESHUMAN IMPACT BY DISASTER TYPES

IMPACTS OF DISASTER

Direct impacts.: Occur immediately during or after disaster phenomenon– damage to human and physical assets

impacts on assets infrastructure capital stocks loss of life

INDIRECT IMPACTS

Are perceived after the phenomenon, for a time period that can last from weeks to months, till recuperation occurs

loss of investment loss of earnings & unemployment, Increased expenses both private and public loss of productivity due to death, illness and

injuries, increase in operational cost cost of alternative provision good and services

SECONDARY IMPACTS

Include macroeconomic impacts and longer-term impacts

Repercussions on the economic performance after disaster

May persist for a number of years after the disaster, depending on the characteristics and magnitude

SECONDARY IMPACTS

Gross Domestic Product growth State of public finance e.g. decline in

tax revenueIncreases of prices and inflation Balance of payments, trade deficits

and raise in level of indebtedness

IMPACTS OF DISASTER

All of these impacts have significant adverse effects on the social and economic development Employment, housing, factors of production

and income Reallocation of expenditure that occurs

following a disaster. The losses are particularly damaging when

depriving countries of resources, which could otherwise be used for economic and social development.

Why is Disaster a Development Issue?

Disasters can also cause potential declines in revenue Disaster proneness may act as a disincentive to new

investorsDisasters reduce government’s ability to invest in

developmental projectsSerious threats to long-term development result from

the reallocation of expenditure that occurs following a disaster

Responding to disasters also undermines budgetary planning, investment confidence and interrupts ongoing projects and reduces the abilities of communities and governments to pursue long term development goals.

IMPACTS OF DISASTER ON CAPITAL FORMATION

Risk Reduction Investments

Opportunities for changing levels and forms of vulnerability

Involves the private sector as well as the public sector

Sufficient funding for post disaster reconstruction

Development of appropriate ex-ante risk funding instruments, including reinsurance

Benefits that reduce vulnerability but also support economic growth and development

Risk Reduction InvestmentHazard

Floods, drought, etc Elements at risk

Capital stock, population Physical vulnerability

Susceptibility to physical damage

RiskPotential direct losses

STEP 1

Financial vulnerability /potential financing gaps

Ability to finance reconstruction of lost stocks and provide assistance to households and

private sector STEP 2

Macro economic impactsEffects of losing capital stock and

diverting funds for financing lossesSTEP 3

Ex-ante instruments

MitigationInsurance Reserve fundContingent credit

Disaster Risk Transfer

Risk transfer mechanisms shift financial risk from one party to another

The two basic tools for catastrophic risk are; Insurance Instruments for spreading risk directly to the

capital marketAn insurance policy provides cash payouts in

the aftermath of a disaster in return of premiums

Insurance companies, in turn, redistribute their risk to global reinsurers

Post- and Pre- Disaster Financial Instruments

Type SourcePre-disaster risk-transfer

•Reserve /contingent fund•Insurance•Bonds•Contingent credit

Post-disaster financingDecreasing government expenditures

Diversion from budget

Raising government revenues TaxationDeficit financingDomestic

Central Bank creditForeign reservesDomestic bonds and credit

Deficit financingExternal

Multilateral borrowingInternational borrowingAssistance

Risk Transfer – Insurance

Increase in public insurance, stimulate more extensive and fuller private coverage.

In developing countries - poor state of domestic insurance markets and a resultant inability to transfer risk to international reinsurance markets.

Undercapitalisation of domestic insurance market developing - minimal capacity to retain exposure to the risk of natural disasters.

Risk Transfer – Insurance

Limited catastrophic risk coverage largely reinsured through international markets that raise the cost of insurance

 Less than 1% of total direct losses from natural disasters are insured in developing countries

Insurance coverage tends to be limited to major commercial properties in urban areas

Risk Transfer – Insurance

Low-income consumers have less discretionary income, fewer assets to insure, and are expensive for commercial insurers to reach and service.

 Obstacles to coverage of disaster risk include affordability, demand, determination of insurance parameters for verification of loss, and the structure of the insurance industry

Water and disaster management

Investment for mitigation of water related disasters double as investments for WRM

Measures include improved basin management, river flow regulation and regular maintenance of water storage facilities and sources

Can be managed as normal part of water resources management and development

Cost of disaster management covered and sustained within the water use charges

Discussion Question

How can government help create a reserve fund, insure, or purchase other pre-disaster risk-transfer instruments?

Lessons Learnt

Cost of disaster make up a growing burden to the poor

Disasters have an adverse effects on development but often overlooked in development programming

Development of disaster insurance provide liquidity immediately following natural disasters

Water resources development investment may reduce disaster risk and offer socio-economic benefits as well