Financial protection of the state against natural disasters : a primer

Abstract

This paper has been prepared for policy makers interested in establishing or strengthening financial strategies to increase the financial response capacity of governments of developing countries in the aftermath of natural disasters, while protecting their long-term fiscal balances. It analyzes various aspects of emergency financing, including the types of instruments available, their relative costs and disbursement speeds, and how these can be combined to provide cost-effective financing for the This paper—a joint product of the Hazard Risk Management Unit, Latin American and the Caribbean Region; the Non- Banking Financial Institutions Unit of the Global Capital Market Development Department, Finance and Private Sector Development Vice Presidency; and the Global Facility for Disaster Reduction and Recovery Unit, Sustainable Development Network Vice Presidency—is part of a larger effort in the departments to mainstream disaster risk financing in disaster risk management operations. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at omahul@worldbank.org. The authors are grateful to the participants at the Insurance Workshop of the National Bureau of Economic Research in Cambridge, MA in May 2010 for their suggestions and constructive comments. different phases that follow a disaster. The paper explains why governments are usually better served by retaining most of their natural disaster risk while using risk transfer mechanisms to manage the excess volatility of their budgets or access immediate liquidity after a disaster. Finally, it discusses innovative approaches to disaster risk financing and provides examples of strategies that developing countries have implemented in recent years.