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Evaluating sovereign disaster risk finance strategies : a framework

Author

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  • Clarke,Daniel Jonathan
  • Mahul,Olivier
  • Poulter,Richard Andrew
  • Teh,Tse-Ling

Abstract

This paper proposes a framework for ex ante evaluation of sovereign disaster risk finance instruments available to governments for funding disaster losses. The framework can be used by governments to help choose between different financial instruments, or between different combinations of instruments, to achieve appropriate and financially efficient strategies to fund disaster losses, taking into account the risk of disasters, economic conditions, and political constraints. The paper discusses the framework in the context of a hypothetical country, with parameters selected to represent a disaster-prone small island state. The paper shows how a mix of instruments can be chosen to minimize the economic opportunity cost given the underlying disaster risk faced and prevailing economic and financial conditions.

Suggested Citation

  • Clarke,Daniel Jonathan & Mahul,Olivier & Poulter,Richard Andrew & Teh,Tse-Ling, 2016. "Evaluating sovereign disaster risk finance strategies : a framework," Policy Research Working Paper Series 7721, The World Bank.
  • Handle: RePEc:wbk:wbrwps:7721
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    References listed on IDEAS

    as
    1. Tito Cordella & Eduardo Levy Yeyati, 2015. "CATalytic insurance: the case of natural disasters," Oxford Review of Economic Policy, Oxford University Press, vol. 31(3-4), pages 330-349.
    2. Darius Lakdawalla & George Zanjani, 2012. "Catastrophe Bonds, Reinsurance, and the Optimal Collateralization of Risk Transfer," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(2), pages 449-476, June.
    3. Lee, Jin-Ping & Yu, Min-Teh, 2007. "Valuation of catastrophe reinsurance with catastrophe bonds," Insurance: Mathematics and Economics, Elsevier, vol. 41(2), pages 264-278, September.
    4. Clarke, Daniel J. & Dercon, Stefan, 2016. "Dull Disasters?: How planning ahead will make a difference," OUP Catalogue, Oxford University Press, number 9780198785576.
    5. Charlotte Benson & Edward J. Clay, 2004. "Understanding the Economic and Financial Impacts of Natural Disasters," World Bank Publications, The World Bank, number 15025, June.
    6. 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.
    7. Clarke,Daniel Jonathan & Wren-Lewis,Liam, 2016. "Solving commitment problems in disaster risk finance," Policy Research Working Paper Series 7720, The World Bank.
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