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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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    11. Mahul, Olivier & Gurenko, Eugene, 2006. "The macro financing of natural hazards in developing countries," Policy Research Working Paper Series 4075, The World Bank.
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    Cited by:

    1. Ashu Tiwari & Archana Patro, 2018. "Memory, Risk Aversion, and Nonlife Insurance Consumption: Evidence from Emerging and Developing Markets," Risks, MDPI, vol. 6(4), pages 1-17, December.
    2. Balaei, Behrooz & Noy, Ilan & Wilkinson, Suzanne & Potangaroa, Regan, 2021. "Economic factors affecting water supply resilience to disasters," Socio-Economic Planning Sciences, Elsevier, vol. 76(C).
    3. Michael G. Faure & Kristel De Smedt, 2019. "Compensation for victims of disasters: a task for Europe?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(4), pages 732-759, October.
    4. Guillermo Perry, 2013. "Regional Public Goods in Finance, Trade and Infrastructure," Documentos CEDE 011888, Universidad de los Andes - CEDE.
    5. James C. Brau & Craig Merrill & Kim B. Staking, 2011. "Insurance Theory And Challenges Facing The Development Of Microinsurance Markets," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 411-440.

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    Keywords

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