Catastrophe Risk Management : Using Alternative Risk Financing and Insurance Pooling Mechanisms
Residual stochastic risks from catastrophic natural events can be addressed through insurance pooling and risk transfer mechanisms that provide the basis for financial protection and instill strong incentives for reducing vulnerability. To reduce t...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/02/1047385/catastrophe-risk-management-using-alternative-risk-financing-insurance-pooling-mechanisms http://hdl.handle.net/10986/19706 |
| Summary: | Residual stochastic risks from
catastrophic natural events can be addressed through
insurance pooling and risk transfer mechanisms that provide
the basis for financial protection and instill strong
incentives for reducing vulnerability. To reduce the
economic stress after disasters, the author shows, World
Bank instruments could be used to support initiaitves to
help correct market imperfections in catastrophe insurance.
He takes a step-by-step approach to showing how both risk
pooling structures and alternative catastrophe coverage
mechanisms (long-maturity risk financing facilities,
weather-indexed contracts, and capital market instruments)
can achieve better risk protection and financing
terms--enough to allow the expansion of insurance coverage
of public assets and private property. The author examines
the insurable assets (private and public) in eight countries
in the easternmost part of the Caribbean and, by quantifying
the portion of the premium and risk used to fund catastrophe
losses, shows that through pooling and the use of
credit-type instruments for catastrophe coverage,
governments and uninsured property owners or enterprises
(with insurable assets) could expect to improve their terms
of coverage. Neither local insurers nor reinsurers would
suffer in profitability. The risk management options the
author examines could lead to real benefits for all
participants (buyers and sellers) in insurance markets. But
four factors are essential for ensuring the integrity of any
participatory insurance scheme for providing risk management
in disaster-prone areas such as the Caribbean: 1) stronger
regulatory requirements and supervision in the insurance
sector; 2) Broad-based, pooled catastrophe funding
structures with efficient risk transfer tools; 3) Public
insurance policies linked to programs for loss reduction in
uninsured sectors; and 4) Stronger risk assessment and
enforcement of such structural measures as zoning and
compliance with building codes. |
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