Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing
AbstractEconomic theory suggests that countries should ignore uncertainty for public investment and behave as if indifferent to risk because they can pool risks to a much greater extent than private investors can. This paper discusses the general economic theory in the case of developing countries. The analysis identifies several cases where the government's risk-neutral assumption does not hold, thus making rational the use of ex ante risk financing instruments, including sovereign insurance. The paper discusses the optimal level of sovereign insurance. It argues that, because sovereign insurance is usually more expensive than post-disaster financing, it should mainly cover immediate needs, while long-term expenditures should be financed through post-disaster financing (including ex post borrowing and tax increases). In other words, sovereign insurance should not aim at financing the long-term resource gap, but only the short-term liquidity need.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 4345.
Date of creation: 01 Sep 2007
Date of revision:
Debt Markets; Hazard Risk Management; Banks&Banking Reform; Insurance&Risk Mitigation; Natural Disasters;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2007-09-24 (Agricultural Economics)
- NEP-ALL-2007-09-24 (All new papers)
- NEP-DEV-2007-09-24 (Development)
- NEP-IAS-2007-09-24 (Insurance Economics)
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