New Mechanisms for financing New Mechanisms for financing physical and financial protectionphysical and financial protection

Financing disaster riskFinancing disaster riskSession 4.3Session 4.3

World Conference on Disaster ReductionWorld Conference on Disaster Reduction1818--22 January, Kobe, Hyogo, Japan22 January, Kobe, Hyogo, Japan

Thursday 20 January (Thursday 20 January (NunobikiNunobiki Room, 10Room, 10--12 hours)12 hours)

The need for financial protection The need for financial protection instrumentsinstruments

•• Insufficient use of insurance and other Insufficient use of insurance and other risk transfer instrumentsrisk transfer instruments

–– ECLACECLAC’’ss observation over 30 yearsobservation over 30 years–– The lessons from the 2004 Caribbean The lessons from the 2004 Caribbean

hurricane seasonhurricane season–– The implications from the Indian Ocean The implications from the Indian Ocean

disasterdisaster

Estimating the socioEstimating the socio--economic effects of disasterseconomic effects of disasters

Secondary Secondary (global and cross cutting) (global and cross cutting)

effectseffectsEffects on people,Effects on people,

& the flow of goods & services& the flow of goods & services

Effects on people &Effects on people &stock of propertystock of property

DirectDirect damagedamage

Indirect lossesIndirect losses

Impact on macroImpact on macro--socio socio economic variables*economic variables*

Physical and financial Physical and financial protectionprotection

•• Save livelihoods and protecting Save livelihoods and protecting infrastructureinfrastructure

•• Profiles of human toll, damage and Profiles of human toll, damage and losses point to need for new, diverse losses point to need for new, diverse forms of financing disaster riskforms of financing disaster risk

•• Face vulnerability of small, less Face vulnerability of small, less diversified economiesdiversified economies

Impact of 2005 Hurricane Impact of 2005 Hurricane season in the Caribbeanseason in the Caribbean

H urricane season 2004. D amage distribution by country

Hurricane IvanCaym an Is lands

56%

Hurricane Jeanne

Haiti5% Hurricane Ivan

Jam aica10%

Hurricane IvanGrenada

15%

Tropical S torm Jeanne

Dom inican Republic

5%

Hurricanes Frances and

JeanneB aham as

9%

Damage profile in the Caribbean Damage profile in the Caribbean Hurricane 2004 seasonHurricane 2004 season

Com position of dam age and losses

Productive Sectors

35.2%

Infrastructure 15.6%

Social Sectors47.5%

Environm ent

1.3%

Em ergency and relief 0.4%

Relative and absolute level of disaster damage

889595

296551

3,432

296

212.00%

8.00%

1.70%

10.50%

183.00%

730.00%

0500

1,0001,5002,0002,5003,0003,5004,000

Grenada Jamaica DominicanRepublic

Bahamas CaymanIslands

Haiti1.00%

10.00%

100.00%

1000.00%

US$ million% of GDP

Impact on GDP expected Impact on GDP expected performance (2004performance (2004--2005)2005)

MINUS 1.4% GrenadaMINUS 0.7% Jamaica

MINIMAL IMPACT Dominican Republic

MINUS 1.7% Bahamas

MINUS 1.9% Cayman Islands

NEGLIGIBLE Haiti

As affected in Banda As affected in Banda AcehAceh (Indonesia, (Indonesia, Dec. 26, 2004)Dec. 26, 2004)

The The ““double whammiesdouble whammies”” of of IndonesiaIndonesia

•• The The ““double whammiesdouble whammies”” of Indonesia (as different of Indonesia (as different from other Indian Ocean affected countries):from other Indian Ocean affected countries):-- Earthquake (9.5 Richter scale) and Tsunami (with 15 min. Earthquake (9.5 Richter scale) and Tsunami (with 15 min.

warning and three waves within a two hour period)warning and three waves within a two hour period)-- A disaster on top of a conflict (as also in Sri Lanka)A disaster on top of a conflict (as also in Sri Lanka)-- Vulnerability exposed by human intervention in the way the Vulnerability exposed by human intervention in the way the

city and city and AcehAceh and North Sumatra villages and towns and North Sumatra villages and towns developed (on floodplains, on beaches not protected by developed (on floodplains, on beaches not protected by mangroves and other vegetation) and hazard related to mangroves and other vegetation) and hazard related to geology (shallowness of epicenter of original earthquake, geology (shallowness of epicenter of original earthquake, expansion and fracture of fault near the Sumatra coast expansion and fracture of fault near the Sumatra coast causing slope collapses undersea increasing the force of causing slope collapses undersea increasing the force of water pressure and wave force)water pressure and wave force)

**** **

** TIMETIME

GR

OSS

CAP

ITAL

FO

RM

ATIO

NG

RO

SS C

APIT

AL F

OR

MAT

ION

DEVELOPING COUNTRIIESDEVELOPING COUNTRIIESINDUSTRIALIZED COUNTRIESINDUSTRIALIZED COUNTRIES

** DISASTERDISASTER

THE EFFECT OF SUCCESSIVE DISASTERS ON THE EFFECT OF SUCCESSIVE DISASTERS ON CAPITAL FORMATIONCAPITAL FORMATION

Adapted from Mora, Adapted from Mora, ““El El impactoimpacto de de loslos desastresdesastres, , aspectosaspectos socialessociales, , polpolíítifcostifcos econeconóómicosmicos, , ambientalesambientalesy y susu relacirelacióónn con el con el desarrollodesarrollo de de nuestrosnuestros papaíísesses (BID, 1999)(BID, 1999)

The use of actuarial, economic and The use of actuarial, economic and statistical tools to determine riskstatistical tools to determine risk

•• Value of assets as a means to determine Value of assets as a means to determine insurance costs (considering reconstruction insurance costs (considering reconstruction costs are always higher than replacement costs are always higher than replacement prices or book value)prices or book value)

•• Value of economic costs (beyond loss of Value of economic costs (beyond loss of business, incorporating increased costs and business, incorporating increased costs and social impact)social impact)

•• Return period or statistical probability for Return period or statistical probability for parametric insurance (scientific information, parametric insurance (scientific information, prediction models of probability as criteria)prediction models of probability as criteria)

Free riding in risk transferFree riding in risk transfer

•• The public / private level of internalising The public / private level of internalising risk and transferring its costs (as risk and transferring its costs (as materialized in disasters)materialized in disasters)

•• The national / international levelThe national / international level•• The need for costThe need for cost--sharing of public sharing of public

goods pricegoods price

What instruments are What instruments are availableavailable

•• CAT bondsCAT bonds•• Disaster contingency fundsDisaster contingency funds•• Insurance and reinsuranceInsurance and reinsurance•• Possible levels of coverage (geographical, regional, Possible levels of coverage (geographical, regional,

national)national)–– Pooling of community resources for Pooling of community resources for microfinancingmicrofinancing and and

micro insurance (raise leverage to enter formal insurance micro insurance (raise leverage to enter formal insurance market)market)

–– Public support mechanisms for insurance protection Public support mechanisms for insurance protection (guarantee mechanisms for lack of property rights or tenure (guarantee mechanisms for lack of property rights or tenure in informal, in informal, SMEsSMEs))

–– Pooling of national resources at national level to reduce cost Pooling of national resources at national level to reduce cost of insurance and share riskof insurance and share risk

Thank youThank you

www.eclac.clwww.eclac.clwww.eclac.cl/mexicowww.eclac.cl/mexicowww.cepal.orgwww.cepal.orgricardo.zapata@cepal.orgricardo.zapata@cepal.org