The macro financing of natural hazards in developing countries

By: Contributor(s): Material type: TextTextSeries: Policy Research Working Paper, no. 4075Publication details: Washington, D.C. World Bank 2006Description: 26 pSubject(s): DDC classification:
  • 332 M2M2
Summary: Mahul and Gurenko propose a financial model to address the design of efficient risk financing strategies against natural disasters at the country level. This risk financing problem is decomposed into two steps. First, the resource gap, defined as the difference between potential losses and available ex post resources (self-retention and international ex post disaster funds), is identified. It determines the losses to be financed by ex ante financial instruments (e.g., reserves, insurance and contingent debt). Second, the cost minimizing financial arrangements are examined within the resource gap, based on the comparison of the marginal costs of the financial instruments. It is solved through a series of graphical analyses that make this complex financial problem easier to apprehend. This model captures and explains the main impacts of financial parameters (e.g., insurance premium, cost of capital) on efficient risk financing structures.
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Mahul and Gurenko propose a financial model to address the design of efficient risk financing strategies against natural disasters at the country level. This risk financing problem is decomposed into two steps. First, the resource gap, defined as the difference between potential losses and available ex post resources (self-retention and international ex post disaster funds), is identified. It determines the losses to be financed by ex ante financial instruments (e.g., reserves, insurance and contingent debt). Second, the cost minimizing financial arrangements are examined within the resource gap, based on the comparison of the marginal costs of the financial instruments. It is solved through a series of graphical analyses that make this complex financial problem easier to apprehend. This model captures and explains the main impacts of financial parameters (e.g., insurance premium, cost of capital) on efficient risk financing structures.

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