Assessing the Financial Vulnerability to Climate-Related Natural Hazards

National governments are key actors in managing the impacts of extreme weather events, yet many highly exposed developing countries -- faced with exhausted tax bases, high levels of indebtedness, and limited donor assistance -- have been unable to...

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Bibliographic Details
Main Authors:	Mechler, Reinhard, Hochrainer, Stefan, Pflug, Georg, Lotsch, Alexander, Williges, Keith
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	AGENTS AGRICULTURAL INSURANCE ALLOCATION BANK CREDIT BASIS POINTS BUDGET CONSTRAINT BUDGET DEFICIT CAPITAL MOVEMENTS CAPITAL STOCK CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHE INSURANCE CATASTROPHE REINSURANCE CATASTROPHES CATASTROPHIC EVENT CATASTROPHIC EVENTS CATASTROPHIC LOSS CATASTROPHIC RISKS CENTRAL BANK CENTRE FOR RESEARCH ON THE EPIDEMIOLOGY CLEAN ENVIRONMENT CLIMATE CLIMATE CHANGE CLIMATE EXTREMES CLIMATE INSURANCE CLIMATE INSURANCE INITIATIVE CLIMATE VARIABILITY COMMERCIAL BANKS CONTINGENT DEBT COST ESTIMATES COSTS OF INSURANCE COUNTRY DEBT COUNTRY RISK CRED CREDIT ARRANGEMENTS CREDIT MARKETS CREDIT POLICY CURRENCY UNITS DAMAGES DEBT DEBT ISSUES DEFICIT FINANCING DEVASTATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DEVELOPMENT ECONOMICS DISASTER DISASTER AID DISASTER EVENT DISASTER EVENTS DISASTER INSURANCE DISASTER PRONE COUNTRIES DISASTER RELIEF DISASTER RISK DISASTER RISK FINANCING DISASTER RISKS DISASTERS DISTRIBUTION OF INCOME DIVERSIFIED PORTFOLIO DOMESTIC BOND DOMESTIC BONDS DOMESTIC CREDIT DOMESTIC FINANCIAL MARKETS DOMESTIC GOVERNMENT BONDS DONOR COMMUNITY DROUGHT EARTHQUAKE EARTHQUAKES ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC IMPACTS ECONOMIC PERSPECTIVE ECONOMIC WELFARE EXPENDITURE EXPENDITURES EXTERNAL CREDIT EXTERNAL DEBT EXTERNAL FINANCE EXTREME DROUGHT EXTREME EVENT EXTREME EVENTS EXTREME VALUE STATISTICS EXTREME VALUE THEORY EXTREME WEATHER EXTREME WEATHER EVENTS FAMINE FARMERS FINANCIAL ASSISTANCE FINANCIAL CAPACITY FINANCIAL EXPOSURE FINANCIAL FLOWS FINANCIAL INSTRUMENTS FINANCIAL MARKETS FINANCIAL NEEDS FINANCIAL RESILIENCE FINANCIAL RESOURCES FINANCIAL RISKS FINANCING SOURCES FISCAL POLICY FLOOD FLOODING FLOODS FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN EXCHANGE RESERVES GLOBAL CAPITAL GLOBAL CAPITAL MARKETS GOVERNMENT BONDS GOVERNMENT BORROWING GOVERNMENT BUDGET GOVERNMENT EXPENDITURES GOVERNMENT FINANCES GOVERNMENT LIABILITIES GOVERNMENT LIABILITY GOVERNMENT REVENUES GOVERNMENT SPENDING GROSS NATIONAL INCOME HEALTH CARE HURRICANE HURRICANES IMPORTS INCOME DISTRIBUTION INCOME GROUPS INCOME HOUSEHOLDS INCREMENTAL COSTS INDEBTEDNESS INFLATION INSTRUMENT INSURANCE INSURANCE ACTIVITIES INSURANCE CONTRACT INSURANCE COVER INSURANCE FUNDS INSURANCE INSTRUMENTS INSURANCE POOLS INSURANCE PREMIUMS INSURANCE SYSTEM INSURANCE SYSTEMS INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BONDS INTERNATIONAL BORROWING INTERNATIONAL FINANCIAL INSTITUTIONS INTERNATIONAL FINANCIAL MARKETS INTERNATIONAL LENDING INTERNATIONAL MARKET INTERNATIONAL MARKETS INTERNATIONAL RESERVES INVENTORY INVESTING INVESTMENT DECISIONS INVESTMENT PROJECTS LIQUIDITY LOAN LOCAL CURRENCY LOSS FUNCTION MACROECONOMIC POLICY MACROECONOMIC RISK MACROECONOMIC STABILITY MARGINAL COST MARKET FAILURE MONEY SUPPLY NATURAL DISASTER NATURAL DISASTERS NATURAL HAZARD NATURAL HAZARDS NEGOTIATIONS NET LOSS OPPORTUNITY COSTS OUTSIDE ASSISTANCE PENSION PORTFOLIOS PREMIUM PAYMENT PRESENT VALUE PROBABILITY OF OCCURRENCE PRODUCTIVITY PROGRAMS PUBLIC FINANCE PUBLIC INVESTMENT REINSURANCE REINSURER RELIEF RESERVE RESERVE FUND RESERVE FUNDS RESERVES RETURN RETURNS RISK ASSESSMENT RISK ASSESSMENTS RISK AVERSION RISK INSURANCE RISK MANAGEMENT RISK MANAGEMENT SYSTEMS RISK NEUTRAL RISK PREMIUM RISK REDUCTION RISK SHARING RISK TRANSFER SAFETY SAFETY NETS SAVINGS SCENARIOS SMALL BUSINESSES SOVEREIGN RISK STATE GUARANTEES STOCK DATA STOCKS STORM SUSTAINABILITY TAX TAXATION TECHNICAL ASSISTANCE TRADE BALANCES TRANSACTION TRANSACTION COSTS TROPICAL CYCLONES UNCERTAINTIES WEATHER DERIVATIVE WEATHER EXTREMES WIND SPEED
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100303092429 http://hdl.handle.net/10986/3718

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Summary:	National governments are key actors in managing the impacts of extreme weather events, yet many highly exposed developing countries -- faced with exhausted tax bases, high levels of indebtedness, and limited donor assistance -- have been unable to raise sufficient and timely capital to replace or repair damaged infrastructure and restore livelihoods after major disasters. Such financial vulnerability hampers development and exacerbates poverty. Based on the record of the past 30 years, this paper finds many developing countries, in particular small island states, to be highly financially vulnerable, and experiencing a resource gap (net disaster losses exceed all available financing sources) for events that occur with a probability of 2 percent or higher. This has three main implications. First, efforts to reduce risk need to be ramped-up to lessen the serious human and financial burdens. Second, contrary to the well-known Arrow-Lind theorem, there is a case for country risk aversion implying that disaster risks faced by some governments cannot be absorbed without major difficulty. Risk aversion entails the ex ante financing of losses and relief expenditure through calamity funds, regional insurance pools, or contingent credit arrangements. Third, financially vulnerable (and generally poor) countries are unlikely to be able to implement pre-disaster risk financing instruments themselves, and thus require technical and financial assistance from the donor community. The cost estimates of financial vulnerability -- based on today's climate -- inform the design of "climate insurance funds" to absorb high levels of sovereign risk and are found to be in the lower billions of dollars annually, which represents a baseline for the incremental costs arising from future climate change.

Assessing the Financial Vulnerability to Climate-Related Natural Hazards

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