Fiscal Policy and Disaster Risk Financing Integrating disaster risks in fiscal risk assessment and management Olivier Mahul Program Coordinator Disaster.

Fiscal Policy and Disaster Risk FinancingIntegrating disaster risks in fiscal risk assessment and management

Olivier MahulProgram CoordinatorDisaster Risk Financing and Insurance Program, FCMNB and GFDRRWorld Bank

Climate Public Expenditure and Institutional Review WorkshopSeptember 10-12, 2012Bangkok, Thailand

Economic impact of natural disasters in Asia Pacific

Probable Maximum Loss, as % of national GDP

ASEAN Member StatesAnnual Average Loss, as % of national GDP

Pacific Island Countries

Source: WB (2012) Source: PCRAFI (2011)

Including disaster risks into fiscal risk management

• Sources of fiscal risks– Commodity risk management (e.g., oil

price hedging)– Currency risk management– Market risk in debt management

• Management of contingent liabilities– Infrastructure projects (public-private

partnerships)– Legal actions– State guarantees– Natural disaster risks

• Explicit vs implicit contingent liability of natural disasters– Government owned assets– Low income housing– Small and medium enterprises

Colombia – Fiscal disaster risk assessment

World Bank estimates based on MHCP (2011) and ERN (2011).

AELUS$490

mil

Contingent Liability COP $ Millions US$ Millions % of GDPAnnual Expected Liability

Infrastructure Projects 57,460 26 0.01

Legal Actions 40,812,000 18,642 7.46

Public Credit Operations 122,000 56 0.02

Natural Disasters 691,798 490 0.20

Natural Disasters Probable Maximum Loss

PML 100-yr 6,383,804 2,976 1.19

PML 250-yr 9,669,843 4,417 1.77

PML 500-yr 12,380,114 5,655 2.26

• In 2011, GoC assessed its contingent liability to natural disasters, based on potential losses to public assets and private dwellings of low-income populations

• 2011 National budget ≈ US$ 80 billion; GDP ≈ US$471 billion

• Limitations: Fiscal shocks highly variable, do not capture indirect losses, disasters require immediate liquidity

100-yr PMLUS$3 bil

Source: WB DRFI Program (2011)

World Bank Disaster Risk Management Framework

Financial resilience to disasters

Based on financial disaster risk assessment and modeling

Sovereign Disaster Risk

Financing

Assessment of contingent

liability

Post-disaster budget response

capacity

Catastrophe Risk Market

Development

Insurance of public

infrastructure

Property catastrophe risk

insurance

Agricultural insurance

Disaster microinsurance

World Bank DRFI Framework

Three-tiered risk layering approach

Matching the funding needs over time

Instruments Indicative Cost (multiplier)

Disbursement (months)

Amount of funds available

Donor support (relief) 0-1 1-6 Uncertain

Donor support (recovery & reconstruction) 0-2 4-9 Uncertain

Budget contingencies 1-2 0-9 Small

Reserves 1-2 0-1 Small

Budget reallocations 1-2 0-1 Small

Contingent debt facility (e.g., CAT DDO) 1-2 0-1 Medium

Domestic credit (bond issue) 1-2 3-9 Medium

External credit (e.g. emergency loans, bond issue) 1-2 3-6 Large

Parametric insurance 2 & up 1-2 Large

ART (e.g., CAT bonds, weather derivatives) 2 & up 1-2 Large

Costs and benefits of financial instruments

Understanding Risk for Better (Fiscal) Decision Making

Weather and Climate Informationand Decision-Support Systems

Risk-in-a-Box

WCDIS

WB is building tools to enable informed decision-

making about complex dynamic systems in a

changing climate.

DRM and DRFI

Probabilistic Risk Modeling

DRFI and post-disaster

assistance

Post disaster budget execution

Role of donors

Insurance pricingRole of the

private sectorIndex based insurance

Regional initiatives