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Kazuko Ishigaki, Risk Knowledge EconomistUnited Nations Office for Disaster Risk ReductionGeneva, Switzerland

www.unisdr.org

Disaster losses and Economic Consequences:

Toward Comprehensive Risk Finance Strategy

The First Arab Regional Conference

for Disaster Risk Reduction; Aqaba, Jordan

20, March, 2013

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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

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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

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000Real GDP （Average）

without disaster

Average (with disaster, with IDRR)

Average (with disaster, without IDRR)

million ＄

e.g. Simulation of economic growth and cyclone exposure

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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

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The Need for Comprehensive Risk Financing Strategy

Background

3. Constrained public finance

Fiscal primary balance (% of GDP)

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%Countries with advanced economies

Countries with emerging markets

Low-income countries

Source: IMF (2012)

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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%

Gross Fixed Capital Formation by sector (% to GDP) in low income countries

0.0

5.0

10.0

15.0

20.0

25.0%

PrivatePublic

Gross Fixed Capital Formation by sector (% of GDP ) in lower middle income countries

0.0

5.0

10.0

15.0

20.0

25.0

30.0

%Private Public

Gross Fixed Capital Formation by sector

(% of GDP) in upper middle income countries

0.0

5.0

10.0

15.0

20.0

25.0

30.0

% Private Public

Government consumption vs investment (% of GDP)

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

%

Invest:Upper middle income Invset:Lower middle income

Invest:Low income Consumption:Upper middle income

Consumption:Lower middle income Consumption:Low income

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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)

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Risk Management Tools for Business and Household

Risk reduction Risk finance

Risk avoidance Risk mitigation Risk transfer Risk 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

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Government Policy for Comprehensive Risk Finance

Precondition -Risk assessment-Hazard mapping-Information sharing and education

Individual methods

Risk reduction Risk finance

Risk avoidance Risk mitigation Risk transfer Risk 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 Sectoral ministries/ DM agency

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Government Policy for Comprehensive Risk Finance

Precondition -Risk assessment-Hazard mapping-Information sharing and education

Individual methods

Risk reduction Risk finance

Risk avoidance Risk mitigation Risk transfer Risk 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 agency Ministry of Finance/DM agency

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To prepare for probable maximum disaster

AAL

Extensive Risk

Intensive Risk Uncertainty: We do not know when the disaster occurs…

Year

PML

PML

Along With adequate annual investment for DRR to cover AAL,it is necessary to

financially prepare for probable maximum disaster

$(loss)

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To prepare for probable maximum disaster

Frequency

Economic loss

Extensive Risk

Intensive Risk

Which sector covers which layer of risk?

First loss Excess loss

NZ (EQC)

Turkey (TCIP)

USA (NFIP)

Government

(the public)

Private

First loss Excess loss

USA (FHCF)

Japan

Private Government

Layer A

Layer B

Layer C

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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 Investment Subsidy Tax Regulation

Reduced Disaster Risk

How much impact on reducing loss?

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STEP4 : how to measure the impact of policy on DRR?Cost Benefit Analysis Disaster Impact Analysis

Preconditions •Past disaster loss data•Vulnerability data•Construction standard

Principle •If 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

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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 Transfer Retain

Investment Regulation etc RetainTransfer???

Ideal

Reality

DRR

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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

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• 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

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18STEP5 (related): Critical infrastructure: US and UK definition

US UK

Agriculture and Food Food

Defense industrial base

Energy Energy (oil, gas, electricity)

Healthcare and public health Health

National monuments and icons

Banking and finance Financial services

Water Water

Chemical

Commercial facilities

Critical manufacturing

Dams

Emergency services Emergency services

(police, fire, ambulance, coastguard)

Nuclear reactors, materials and waste

IT communications Communications (telecom, post, broadcast)

Postal and shipping

Transportation system Transportation (highways, rail, ports, aviation)

Government facilities including schools Government

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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.

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DRR mitigates disaster loss and negative economic consequences

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000Real GDP （Average）

without disaster

Average (with disaster, with IDRR)

Average (with disaster, without IDRR)

million ＄

Conclusion: Toward comprehensive risk finance strategy

e.g. Pakistan GDP growth estimate

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Thank you

Contact: Kazuko Ishigaki

United Nations Office for Disaster Risk Reduction

Tel: +41 22 917 3460ishigaki@un.org