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Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing

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  • Ghesquiere, Francis
  • Mahul, Olivier

Abstract

Economic 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.

Suggested Citation

  • 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.
  • Handle: RePEc:wbk:wbrwps:4345
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    References listed on IDEAS

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    1. Fisher, Anthony C, 1973. "Environmental Externalities and the Arrow-Lind Public Investment Theorem," American Economic Review, American Economic Association, vol. 63(4), pages 722-725, September.
    2. 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.
    3. Ricardo J. Caballero, 2003. "The Future of the IMF," American Economic Review, American Economic Association, vol. 93(2), pages 31-38, May.
    4. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    5. Christian Gollier, 2003. "To Insure or Not to Insure?: An Insurance Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 5-24, June.
    6. Ghesquiere, Francis & Jamin, Luis & Mahul, Olivier, 2006. "Earthquake vulnerability reduction program in Colombia : a probabilistic cost-benefit analysis," Policy Research Working Paper Series 3939, The World Bank.
    7. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.
    8. 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.
    9. 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.
    10. Gardner, Roy, 1979. "The Arrow-Lind Theorem in a Continuum Economy," American Economic Review, American Economic Association, vol. 69(3), pages 420-422, June.
    11. Mahul, Olivier & Gurenko, Eugene, 2006. "The macro financing of natural hazards in developing countries," Policy Research Working Paper Series 4075, The World Bank.
    12. 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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    Cited by:

    1. Guillermo Perry, 2013. "Regional Public Goods in Finance, Trade and Infrastructure," DOCUMENTOS CEDE 011888, UNIVERSIDAD DE LOS ANDES-CEDE.
    2. repec:wsi:jdexxx:v:16:y:2011:i:04:n:s1084946711001926 is not listed on IDEAS

    More about this item

    Keywords

    Debt Markets; Hazard Risk Management; Banks&Banking Reform; Insurance&Risk Mitigation; Natural Disasters;

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