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The macro financing of natural hazards in developing countries

Author

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  • Mahul, Olivier
  • Gurenko, Eugene

Abstract

The authors propose a financial model to address the design of efficient risk financing strategies against natural disasters at the country level. It is simple enough to shed analytical light on some of the key issues but flexible and realistic enough to provide some quantitative guidance on the ex ante financing of catastrophic losses. The risk financing problem is decomposed into two steps. First, the resource gap, defined as the difference between losses and available ex-post resources (such as post-disaster aid), is identified. It determines the losses to be financed by ex ante financial instruments (reserves, catastrophe insurance, and contingent debt). Second, the cost-minimizing financial arrangements are derived from the marginal costs of the financial instruments. The model is solved through a series of graphical analyses that make this complex financial problem easier to apprehend. This model captures and explains the main impacts of financial parameters (such as insurance premium, cost of capital) on efficient risk financing structures.

Suggested Citation

  • Mahul, Olivier & Gurenko, Eugene, 2006. "The macro financing of natural hazards in developing countries," Policy Research Working Paper Series 4075, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4075
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    References listed on IDEAS

    as
    1. Gurenko, Eugene & Lester, Rodney, 2004. "Rapid onset natural disasters : The role of financing in effective risk management," Policy Research Working Paper Series 3278, The World Bank.
    2. Ricardo J. Caballero, 2003. "The Future of the IMF," American Economic Review, American Economic Association, vol. 93(2), pages 31-38, May.
    3. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-187, May.
    4. Priest, George L, 1996. "The Government, the Market, and the Problem of Catastrophic Loss," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 219-237, May.
    5. Michael Keen & Paul K. Freeman & Muthukumara Mani, 2003. "Dealing with Increased Risk of Natural Disasters; Challenges and Options," IMF Working Papers 03/197, International Monetary Fund.
    6. David J Hofman & Patricia A Brukoff, 2006. "Insuring Public Finances Against Natural Disasters; A Survey of Options and Recent Initiatives," IMF Working Papers 06/199, International Monetary Fund.
    7. Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
    8. Gurenko, Eugene & Mahul, Olivier, 2003. "Combining insurance, contingent debt, and self-retention in an optimal corporate risk financing strategy," Policy Research Working Paper Series 3167, The World Bank.
    9. Kaplow, Louis, 1991. "Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, Springer, vol. 4(2), pages 167-175, April.
    10. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-378, June.
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    Citations

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    Cited by:

    1. Danuletiu Adina Elena & Danuletiu Dan Constantin & Barna Flavia, 2009. "Agricultural Insurance In Romania," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 3(1), pages 169-175, May.
    2. Ghesquiere, Francis & Mahul, Olivier, 2007. "Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing," Policy Research Working Paper Series 4345, The World Bank.
    3. Victor Cardenas, 2009. "Financiamiento de riesgos catastróficos naturales," Research Department Publications 4613, Inter-American Development Bank, Research Department.

    More about this item

    Keywords

    Insurance&Risk Mitigation; Banks&Banking Reform; Financial Intermediation; Natural Disasters; Non Bank Financial Institutions;

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