Catastrophe Risk Financing in Developing Countries Principles for Public Intervention

by Cummins, J. David; Mahul, Olivier

• ISBN13: 9780821377369
• ISBN10: 0821377361
• Format: Paperback
• Copyright: 2008-10-15
• Publisher: World Bank Publications

Summary

'Catastrophe Risk Financing in Developing Countries' provides a detailed analysis of the imperfections and inefficiencies that impede the emergence of competitive catastrophe risk markets in developing countries. The book demonstrates how donors and international financial institutions can assist governments in middle- and low-income countries in promoting effective and affordable catastrophe risk financing solutions.The authors present guiding principles on how and when governments, with assistance from donors and international financial institutions, should intervene in catastrophe insurance markets. They also identify key activities to be undertaken by donors and institutions that would allow middle- and low-income countries to develop competitive and cost-effective catastrophe risk financing strategies at both the macro (government) and micro (household) levels. These principles and activities are expected to inform good practices and ensure desirable results in catastrophe insurance projects.'Catastrophe Risk Financing in Developing Countries' offers valuable advice and guidelines to policy makers and insurance practitioners involved in the development of catastrophe insurance programs in developing countries.

Table of Contents

Foreword	p. xi
Acknowledgments	p. xv
Abbreviations	p. xvii
Glossary	p. xxi
Overview	p. 1
Toward a Country Catastrophe Risk Financing Framework	p. 2
Why Should Donors Intervene in Catastrophe Risk Markets?	p. 4
How Should Donors Intervene in Catastrophe Risk Markets?	p. 8
What Roles for the Donor Community?	p. 11
Introduction	p. 13
Cost of Natural Disasters in Developing Countries	p. 13
Proactive Country Disaster Risk Management	p. 17
Toward a Country Catastrophe Risk Financing Framework	p. 20
Objectives	p. 25
Market Imperfections and Catastrophe Insurance	p. 27
Basic Features of Catastrophe Insurance Markets	p. 27
Demand-Driven Market Imperfections	p. 39
Supply-Driven Market Imperfections	p. 48
Are Prices of Catastrophe Risk Transfer Instruments Excessive?	p. 64
Summary: Insurance Markets and Market Imperfections	p. 69
Notes	p. 73
Principles for Public Intervention in the Catastrophe Insurance Markets	p. 75
Risks of Public Intervention in Catastrophe Insurance Markets	p. 76
Guiding Principles for Market Intervention	p. 84
Notes	p. 90
Roles for the Donor Community	p. 91
Convening Power	p. 92
Promoter of Public Goods	p. 93
Provider of Technical Assistance for Innovative Catastrophe Risk financing Solutions	p. 99
Financier	p. 104
References	p. 108
Appendixes
World Bank List of Economies	p. 115
Reference Catastrophe Losses	p. 123
Catastrophe Risk Modeling	p. 127
Introduction: Using Modeling to Manage Risk	p. 127
Methodology	p. 128
Risk Metrics	p. 130
Catastrophe Risk Financing Projects Supported by the World Bank and Donors	p. 133
Some Recent Catastrophe Risk Financing Initiatives Supported by the World Bank and Donors	p. 147
Property Catastrophe Insurance Programs for Homeowners	p. 147
Agricultural Insurance Programs	p. 155
Sovereign Risk Financing	p. 162
Notes	p. 176
References	p. 176
Prototype Weather-Based Crop Insurance Policy	p. 177
Commercial Catastrophe Risk Models	p. 179
Review of the Catastrophe Reinsurance Market	p. 185
Introduction	p. 185
The Role of Reinsurance	p. 188
The Global Market for Reinsurance	p. 189
Insurance and Reinsurance Market Response to Mega-Catastrophes	p. 194
Conclusion	p. 206
Notes	p. 207
References	p. 207
CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments	p. 211
Introduction	p. 211
The Structure of Risk-Linked Securities	p. 212
The Risk-Linked Securities Market	p. 222
Conclusion	p. 232
Notes	p. 233
References	p. 233
Catastrophe Reinsurance Pricing	p. 237
Introduction	p. 237
The Mean-Variance Model	p. 238
A More Realistic Actuarial Model	p. 241
Reinsurer's Target Economic Return	p. 244
Numerical Illustration	p. 252
Notes	p. 255
References	p. 255
Index	p. 257
Boxes
GFDRR Financial and Technical Assistance	p. 18
World Bank Group's Catastrophe Risk Products and Services	p. 22
Portfolio Cost of Capital	p. 38
World Bank Project Reallocations After a Natural Disaster	p. 46
Catastrophe (CAT) Bonds	p. 53
Information Prerequisites for Reinsurers to Provide Weather Reinsurance	p. 63
Basic Principles for Efficient Catastrophe Insurance	p. 77
Theories of Market Intervention	p. 84
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