Financial Management of Flood Risks in Developing Countries Risk Sharing and Risk Transfer

DISASTER LOSSES ARE ON THE RISE Source: MunichRe (2000)

Country Vulnerability is Key Countries that can afford their risks, eg Austria Countries that can afford their risks, but with regions that cannot, eg Hungary Countries that cannot afford their risks, eg El Salvador

The Upper Tisza Study ___________________________________________________________________________________________________________________ Hydro-Model One-dimension Unsteady Flow Flood Model GIS-Based Flood Depth Loss Model Agriculture Infrastructure Public Survey Policy Model Cost-Benefit Stochastic Opt. Stakeholder Interviews informed by the model Stakeholder Workshop

Public/Private Insurance System ___________________________________________________________________________________________________________________ Scenario 1Scenario 2Scenario 3 Voluntary private insurance (cross subsidies) Voluntary private insurance (risk based) All-hazards private insurance (cross subsidies, government pays premiums for poor) Government reinsurance (with tax payer support) Government compensates victims (percentage of losses) Government compensates victims (fixed amount) Voluntary private insurance (cross subsidies)

Pre- and Post-Disaster Financing Options (Mitigation) Catastrophe fund Insurance Other hedging instruments, eg Cat bonds Contingent credit Budget diversions Borrowing –internal –external Loan diversions Taxes Aid

Stability vs. Growth

Catch 22 The countries that can benefit from pre-disaster financing instruments are those that can least afford it. Challenge: Can we design new forms of "pre-disaster" aid to developing countries that will enable them to insure against disaster risks, and that link this insurance with loss mitigation measures?

Proposal To transfer developing country risks into the global financial markets through International financial institutions Private "charitable" investors Institutional "charitable" investors