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Www.unisdr.org 1 Kazuko Ishigaki, Risk Knowledge Economist United Nations Office for Disaster Risk Reduction Geneva, Switzerland www.unisdr.org Disaster.

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Presentation on theme: "Www.unisdr.org 1 Kazuko Ishigaki, Risk Knowledge Economist United Nations Office for Disaster Risk Reduction Geneva, Switzerland www.unisdr.org Disaster."— Presentation transcript:

1 1 Kazuko Ishigaki, Risk Knowledge Economist United Nations Office for Disaster Risk Reduction Geneva, Switzerland Disaster losses and Economic Consequences: Toward Comprehensive Risk Finance Strategy The First Arab Regional Conference for Disaster Risk Reduction; Aqaba, Jordan 20, March, 2013

2 2 Contents 1.Need for Comprehensive Risk Finance Strategy 2.Risk Management Tools for Private Sector and Government 3.To Prepare for Probable Maximum Disaster 4.Process of evidence-based decision making 5.Conclusion

3 3 The Need for Comprehensive Risk Financing Strategy Background 1 Increase/intensification of disaster interruption or slow down to economic growth e.g. Pakistan GDP growth estimate e.g. Simulation of economic growth and cyclone exposure

4 4 The Need for Comprehensive Risk Financing Strategy Background 2. Economic growth increase of economic loss in the event of disaster e.g. Annual Average Losses from cyclonic wind by risk class

5 5 The Need for Comprehensive Risk Financing Strategy Background 3. Constrained public finance Source: IMF (2012)

6 6 The Need for Comprehensive Risk Financing Strategy Background 4. Constrained public investment - Investment vs consumption 5. Increasing importance of private investment - Public/Private investment share OECD 16%: 84% Developing countries 30-40% : 60-70%

7 7 The Need for Comprehensive Risk Financing Strategy Challenges and Options A: To decrease economic loss in the event of disaster Invest in disaster risk reduction and preparedness B: To finance the response/recovery/reconstruction after disaster Transfer risk and/or pool money Both require ex-ante financing under tight budget constraint Need for Comprehensive Risk Financing Strategy Q1 How much money should be allocated to comprehensive risk financing? (size of total pie) Q2 What is the most efficient and effective allocation of money between option A (risk reduction) and B (risk transfer and risk retention)? (how to divide the pie)

8 8 Risk Management Tools for Business and Household Risk reductionRisk finance Risk avoidanceRisk mitigationRisk transferRisk retaining Business No business in hazard prone area -Diversifying business location -Improving resiliency of offices etc -Crafting BCP -Buying insurance - Issuing cat bonds -Setting allowance for contingency -Establishing captive companies Household No housing in hazard prone area Improving resiliency of housings Buying insurance Dedicated savings in the event of disaster Insurance companies Selecting risks which can be insured Providing buyers with DRR incentive (e.g. premium setting linked to risk level) -Buying reinsurance -Issuing cat bonds Setting deductible and liability limit

9 9 Government Policy for Comprehensive Risk Finance Precondition -Risk assessment -Hazard mapping -Information sharing and education Individual methods Risk reductionRisk finance Risk avoidanceRisk mitigationRisk transferRisk retaining -Land use planning -Helping relocation -Establishing early warning system -Helping evacuation planning -Infrastructure investment in DRR -Critical infrastructure protection -Establishing building code -Helping BCP -Providing incentive for insurance - Providing incentive for Issuing bonds -Providing incentive for reserve establishment (1) To affect private corporations and households Responsibility Sectoral ministries/DM agency

10 10 Government Policy for Comprehensive Risk Finance Precondition -Risk assessment -Hazard mapping -Information sharing and education Individual methods Risk reductionRisk finance Risk avoidanceRisk mitigationRisk transferRisk retaining -No government offices, important public asset and facility in hazard prone area -Critical Infrastructure protection -Response plan -Government BCP -Buying insurance - Issuing bonds -Establishing reserve -Contingency credit contract (2) To assure business continuity of government Responsibility Sectoral ministries/DM agencyMinistry of Finance/DM agency

11 11 To prepare for probable maximum disaster AAL Extensive Risk Intensive Risk Uncertainty: We do not know when the disaster occurs… Year PML Along With adequate annual investment for DRR to cover AAL, it is necessary to financially prepare for probable maximum disaster $ (loss)

12 12 To prepare for probable maximum disaster Frequency Economic loss Extensive Risk Intensive Risk Which sector covers which layer of risk? First lossExcess loss NZ (EQC) Turkey (TCIP) USA (NFIP) Government (the public) Private First lossExcess loss USA (FHCF) Japan PrivateGovernment Layer A Layer B Layer C

13 13 STEP4: Measure the impact of policy tools on DRR (avoided economic loss) Process of evidence-based decision making STEP1 : Produce risk (annual average loss & probable maximum loss) estimate. STEP2: Choose the return period to cover : political decision STEP3: Define the expected level of DRR: political decision Risk Policy Public InvestmentSubsidyTaxRegulation Reduced Disaster Risk How much impact on reducing loss?

14 14 STEP4 : how to measure the impact of policy on DRR? Cost Benefit AnalysisDisaster Impact Analysis PreconditionsPast disaster loss data Vulnerability data Construction standard PrincipleIf the present value of benefit is equal to or more than 1, invest. The higher C/B ratio, the more preferable the project is. Before the project implementation, analyze and measure the disaster impact of the project and/or project impact on disaster. If the negative impact is measured, include the mitigation cost in the total project cost. Methodological problems (examples) How to assign monetary value to saved life? How to assign monetary value to avoided loss? Same as CBA Institutional Problems (examples) Who does the analysis? Administrative burden Same as the CBA Enforcement

15 15 STEP5: Check the gap between the expected level of DRR and current level of DRR STEP6: Decide how to do with the gap: implement more DRR or transfer risk? :political decision Process of evidence-based decision making Policy AAL Investment Regulation etc TransferRetain Investment Regulation etc RetainTransfer??? Ideal Reality DRR

16 16 STEP5 (related): Main Challenges in DRR Investment Tracking: Lessons from the recent studies (Main methodological challenges) How to count embedded DRR investment? (e.g. water management) How to separate DRR from reconstruction investment? (e.g. subsidy for housing relocation after disaster) How to measure private sector investment, for example, PPP? How to measure local government investment? (for example, many project are co-financed by national and local governments) How to make the tracking comparable across countries and along time? (e.g. common or comparable definition of DRR, counting method) It requires additional administrative burden on government

17 17 DRR budget of DM Agency: easy to identify Main DRR tools embedded in sectoral budgets DRR Infrastructure investment - 100% for DRR (not embedded) e.g. coastal levees - x % for DRR (embedded but separable) sub-category of budget item e.g. emergency train stop equipment for train - multiple purpose including DRR (completely embedded) e.g. multi purpose dam, meteorological monitoring STEP5 (related): Main Challenges in DRR Investment Tracking: Lessons from the recent studies

18 18 STEP5 (related): Critical infrastructure: US and UK definition USUK Agriculture and FoodFood Defense industrial base EnergyEnergy (oil, gas, electricity) Healthcare and public healthHealth National monuments and icons Banking and financeFinancial services Water Chemical Commercial facilities Critical manufacturing Dams Emergency services (police, fire, ambulance, coastguard) Nuclear reactors, materials and waste IT communicationsCommunications (telecom, post, broadcast) Postal and shipping Transportation systemTransportation (highways, rail, ports, aviation) Government facilities including schoolsGovernment

19 19 Conclusion: Toward comprehensive risk finance strategy (1) Constructing information and knowledge base is essentially important. Not only hazard risk information but also disaster loss and vulnerability information is necessary as a fundamental base for sound policy making Ensure that information leads to implementation: measuring the impact of policy on DRR would bridge the risk information, vulnerability information and government coping capacity information, and facilitate the DRR investment implementation. (2) Better governance building is necessary. In addition to traditional DM agency, MOF and Planning Authority should be key stakeholders. Sectoral ministries, especially Ministry which has responsibility for infrastructure building, are also important stakeholders. Private sector, especially insurance sector and construction sector, had better be mobilized for cooperation.

20 20 DRR mitigates disaster loss and negative economic consequences Conclusion: Toward comprehensive risk finance strategy e.g. Pakistan GDP growth estimate

21 21 Thank you Contact: Kazuko Ishigaki United Nations Office for Disaster Risk Reduction Tel:


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