The macro financing of natural hazards in developing countries

There are many practical reasons and financial incentives for disaster-prone developing countries rely on post-disaster aid instead of proactive ex ante risk management through insurance. This paper suggests a financial model for risk funding that would provide countries with strong economic incentives to engage in active risk management.

The paper explains the main limitations of post-disaster funding, then sets out its model, using graphical analyses to illustrate the tradeoffs involved in devising efficient risk financing structures. It proposes a model which would reward with additional fiscal resources those countries which had invested in ex ante risk management. This would involve partially linking donors’ post-disaster reconstruction grants and emergency loans from major development banks to progress achieved by countries in catastrophe risk management. This approach would also rest on the notion of leveraging the Bank’s emergency funding with that of international reinsurance and capital markets.