Financial Management of Flood Risk

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Financial Management of Flood Risk

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Financial Management of Flood Risk

OECD 2016

This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein

do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city

or area.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is

without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international

law.

FOREWORD

FINANCIAL MANAGEMENT OF FLOOD RISK OECD 2016 3

Foreword

Disasters present a broad range of human, social, financial, economic and

environmental impacts, with potentially long-lasting, multi-generational effects. The

financial management of these impacts is a key challenge for individuals and

governments in developed and developing countries. G20 Finance Ministers and Central

Bank Governors and APEC Finance Ministers have recognised the importance and

priority of disaster risk management strategies and, in particular, disaster risk assessment

and risk financing.

The OECD has supported the development of strategies for the financial management

of natural and man-made disaster risks, under the guidance of the OECD High-Level

Advisory Board on Financial Management of Large-scale Catastrophes and the OECD

Insurance and Private Pensions Committee. This work has included the elaboration of an

OECD Recommendation on Good Practices for Mitigating and Financing Catastrophic

Risks and a draft Recommendation on Disaster Risk Financing Strategies to update the

OECDs guidance in this area, as well as a number of global events aimed at sharing

experience on approaches to disaster risk financing and identifying key challenges where

international cooperation would be beneficial. In cooperation with other international

organisations, the OECD has also responded to requests from the G20 and APEC through

the development of the G20/OECD Framework for Disaster Risk Assessment and Risk

Financing and a report on Disaster Risk Financing in APEC Economies: Practices and

Challenges. In 2015, the OECD published Disaster Risk Financing: A Global Survey of

Practices and Challenges which provides an overview of the disaster risk assessment and

financing practices of a broad range of economies relative to the guidance elaborated in

G20/OECD Framework for Disaster Risk Assessment and Risk Financing.

The Financial Management of Flood Risk extends this work by applying the lessons

from the OECDs analysis of disaster risk financing practices and the development of its

guidance to the specific case of floods. This report was prepared by the OECD Secretariat

based on input provided in response to an OECD survey questionnaire as well as research

undertaken by the OECD and other international organisations. The report provides an

overview of the approaches that economies facing various levels of flood risk and

economic development have taken to managing the financial impacts of floods. The

report benefited from the support and input of the OECD High-Level Advisory Board on

the Financial Management of Large-Scale Catastrophes and the OECD Insurance and

Private Pensions Committee.

TABLE OF CONTENTS

FINANCIAL MANAGEMENT OF FLOOD RISK OECD 2016 5

Table of contents

Abbreviations and acronyms ................................................................................................................... 8

Executive summary .................................................................................................................................. 9

Chapter 1. Introduction ......................................................................................................................... 11

Notes ..................................................................................................................................................... 15 References ............................................................................................................................................. 15

Chapter 2. Flood risk in a changing climate ......................................................................................... 17

2.1 Trends in the occurrence and impact of flood events ..................................................................... 19 2.2 The economic impact of floods ....................................................................................................... 23 2.3 Potential impact of climate change on the intensity and frequency of flood events ....................... 26 2.4 The potential role of insurance in reducing economic disruption ................................................... 30 Notes ..................................................................................................................................................... 33 References ............................................................................................................................................. 34

Chapter 3. Insuring flood risk ............................................................................................................... 39

3.1 Financial protection against flood risk across countries ................................................................. 40 3.2 Underinsurance of flood risk .......................................................................................................... 48 3.3 Challenges to insuring flood risk .................................................................................................... 51 Notes ..................................................................................................................................................... 58 References ............................................................................................................................................. 59

Chapter 4. Improving the insurability of flood risk ............................................................................. 63

4.1 Investments in risk reduction .......................................................................................................... 64 4.2 Mapping and modelling of flood risk ............................................................................................. 79 4.3 Addressing limited demand for flood insurance ............................................................................. 82 Notes ..................................................................................................................................................... 95 References ............................................................................................................................................. 96

Chapter 5. Managing the fiscal cost of floods ..................................................................................... 107

5.1 The fiscal costs of floods .............................................................................................................. 108 5.2 Minimising fiscal costs ................................................................................................................. 109 5.3 Options for risk financing and transfer ......................................................................................... 116 5.4 Costs and benefits of different approaches to fiscal management of flood risk ........................... 120 References ........................................................................................................................................... 121

Chapter 6. Designing a disaster risk financing strategy for flood risk ............................................. 127

6.1 Estimating exposures and identifying financial vulnerabilities .................................................... 128 6.2 Supporting the use of risk financing tools .................................................................................... 129

TABLE OF CONTENTS

6 FINANCIAL MANAGEMENT OF FLOOD RISK OECD 2016

6.3 Ensuring adequate support for the vulnerable ............................................................................... 130 6.4 Managing government exposures ................................................................................................. 131 Notes ................................................................................................................................................... 133 References ........................................................................................................................................... 133

Tables

1.1. Perceptions of flood risk .............................................................................................................. 13 2.1. Largest flood events (including cyclone-related flooding) since 2000

(constant 2015 USD billion) ........................................................................................................ 22 3.1. Insurance arrangements for floo