Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing

Economic theory suggests that countries should ignore uncertainty for public investment and behave as if indifferent to risk because they can pool risks to a much greater extent than private investors can. This paper discusses the general economic...

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Main Authors:	Ghesquiere, Francis, Mahul, Olivier
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACCESS TO INSURANCE AGENTS AMOUNT OF RISK APPLICATIONS ASSET CLASS ASSET CLASSIFICATION AVALANCHES BALANCE SHEET BALANCE SHEETS BANK LOAN BANK POLICY BASIS POINT BOND BOND ISSUER BOND ISSUES BOND MARKET BONDS BORROWING CAPACITY BUSINESS INTERRUPTION INSURANCE CALL OPTION CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS CASH PAYMENT CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHES CATASTROPHIC EVENT CATASTROPHIC EVENTS CATASTROPHIC INSURANCE CATASTROPHIC LOSSES CATASTROPHIC RISKS CLAIM PAYMENT COMMERCIAL DEBT CONTINGENT DEBT CONTINGENT DEBTS COST OF CAPITAL COUNTRY RISK COVERAGE CREDIT LINE CREDIT LINES CREDIT RISK CREDITORS DAMAGE ASSESSMENT DAMAGES DEBT BURDEN DEBT OBLIGATIONS DEBT RESTRUCTURING DEBT SERVICE DEBT SERVICES DERIVATIVE DERIVATIVE TRANSACTION DEVASTATION DEVELOPING COUNTRIES DISASTER EVENT DISASTER INSURANCE DISASTER PRONE COUNTRIES DISASTER RECONSTRUCTION DISASTER RECOVERY DISASTER RISK DISASTER RISKS DISASTER SITUATION DISBURSEMENTS DISCOUNT RATE DIVERSIFIED PORTFOLIO DOMESTIC CREDIT DOMESTIC DEBT EARTHQUAKE EARTHQUAKES ECONOMIC RISK EMERGENCY ASSISTANCE EMERGENCY NEEDS EMERGENCY RECOVERY EMERGENCY RESPONSE EMERGING MARKET EMERGING MARKET COUNTRIES EXCISE TAXES EXPENDITURE EXPENDITURES EXTERNAL DEBT EXTERNALITIES FEDERAL RESERVE FEDERAL RESERVE BANK FINANCES FINANCIAL INSTRUMENT FINANCIAL INSTRUMENTS FINANCIAL MARKETS FINANCIAL SUPPORT FIRE FISCAL POLICIES FLOODING FLOODS GOVERNMENT ASSETS GOVERNMENT BUDGET GOVERNMENT CAPACITY GOVERNMENT DEFICIT GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOLDING HOUSING HURRICANE HURRICANES IMPACT OF DISASTER INDEBTEDNESS INDEMNITY INDEMNITY INSURANCE INFRASTRUCTURE LOANS INSTITUTIONAL INVESTORS INSTRUMENT INSURANCE INSURANCE CLAIMS INSURANCE COVERAGE INSURANCE INDUSTRY INSURANCE MARKET INSURANCE MARKETS INSURANCE PENETRATION INSURANCE POLICY INSURANCE PREMIUM INSURANCE PREMIUMS INSURANCE PRODUCTS INSURED LOSSES INSURERS INTERNATIONAL BANK INTERNATIONAL CREDIT INTERNATIONAL FINANCIAL MARKETS INVENTORY LANDSLIDES LEGISLATION LEVEL OF DEBT LEVY LINES OF CREDIT LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS LIQUIDITY CRISIS LOAN LOAN COMMITMENTS LOCAL BUSINESSES LONG-TERM RESOURCE MACROECONOMIC RISK MARKET INSTRUMENTS MATURITY MORAL HAZARD MUNICIPALITIES NATURAL DISASTER NATURAL DISASTERS NATURAL HAZARDS NEUTRALITY OPPORTUNITY COST OPPORTUNITY COSTS PLEDGES PORTFOLIO PRESENT VALUE PRINCIPAL PAYMENTS PRIVATE CAPITAL PRIVATE INVESTMENTS PRIVATE INVESTORS PROGRAMS PUBLIC ASSETS PUBLIC EXPENDITURES PUBLIC FINANCES PUBLIC INVESTMENT PUBLIC INVESTMENTS PUT OPTIONS RECAPITALIZATION RECOVERY OPERATION RECOVERY OPERATIONS REINSURANCE REINSURANCE CAPACITY REINSURANCE COMPANIES REINSURANCE MARKETS REINSURERS RELIEF RELIEF EFFORTS RELIEF OPERATION RELIEF OPERATIONS REPAYMENT REPAYMENT OF PRINCIPAL RESERVE RESERVE FUND RESERVE FUNDS RESERVES RETURN RETURNS RISK ASSESSMENT RISK AVERSION RISK CAPITAL RISK DIVERSIFICATION RISK EXPOSURE RISK INSURANCE RISK MANAGEMENT RISK MITIGATION RISK NEUTRAL RISK PREMIUM RISK PROFILE RISK REDUCTION RISK TRANSFER SAFETY SAFETY NET SAFETY NETS SECURITIES SETTLEMENT SHORT-TERM LIQUIDITY SMALL BUSINESS SUB-NATIONAL ENTITIES SWAP SYSTEMIC RISK TAX TAX ADMINISTRATION TAXATION TERM STRUCTURE OF INTEREST RATES TIDAL WAVES TOTAL DEBT TOURISM TAXES TRANSACTION TRANSACTION COSTS TRANSPORT TREASURY TREASURY BONDS TROPICAL STORMS UNDERLYING ASSET VOLCANIC ERUPTION VOLCANIC ERUPTIONS WEALTH EFFECT WESTERN EUROPE WIND SPEED
Online Access:	http://documents.worldbank.org/curated/en/2007/09/8268122/sovereign-natural-disaster-insurance-developing-countries-paradigm-shift-catastrophe-risk-financing http://hdl.handle.net/10986/7331

id	okr-10986-7331
recordtype	oai_dc
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ACCESS TO INSURANCE AGENTS AMOUNT OF RISK APPLICATIONS ASSET CLASS ASSET CLASSIFICATION AVALANCHES BALANCE SHEET BALANCE SHEETS BANK LOAN BANK POLICY BASIS POINT BOND BOND ISSUER BOND ISSUES BOND MARKET BONDS BORROWING CAPACITY BUSINESS INTERRUPTION INSURANCE CALL OPTION CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS CASH PAYMENT CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHES CATASTROPHIC EVENT CATASTROPHIC EVENTS CATASTROPHIC INSURANCE CATASTROPHIC LOSSES CATASTROPHIC RISKS CLAIM PAYMENT COMMERCIAL DEBT CONTINGENT DEBT CONTINGENT DEBTS COST OF CAPITAL COUNTRY RISK COVERAGE CREDIT LINE CREDIT LINES CREDIT RISK CREDITORS DAMAGE ASSESSMENT DAMAGES DEBT BURDEN DEBT OBLIGATIONS DEBT RESTRUCTURING DEBT SERVICE DEBT SERVICES DERIVATIVE DERIVATIVE TRANSACTION DEVASTATION DEVELOPING COUNTRIES DISASTER EVENT DISASTER INSURANCE DISASTER PRONE COUNTRIES DISASTER RECONSTRUCTION DISASTER RECOVERY DISASTER RISK DISASTER RISKS DISASTER SITUATION DISBURSEMENTS DISCOUNT RATE DIVERSIFIED PORTFOLIO DOMESTIC CREDIT DOMESTIC DEBT EARTHQUAKE EARTHQUAKES ECONOMIC RISK EMERGENCY ASSISTANCE EMERGENCY NEEDS EMERGENCY RECOVERY EMERGENCY RESPONSE EMERGING MARKET EMERGING MARKET COUNTRIES EXCISE TAXES EXPENDITURE EXPENDITURES EXTERNAL DEBT EXTERNALITIES FEDERAL RESERVE FEDERAL RESERVE BANK FINANCES FINANCIAL INSTRUMENT FINANCIAL INSTRUMENTS FINANCIAL MARKETS FINANCIAL SUPPORT FIRE FISCAL POLICIES FLOODING FLOODS GOVERNMENT ASSETS GOVERNMENT BUDGET GOVERNMENT CAPACITY GOVERNMENT DEFICIT GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOLDING HOUSING HURRICANE HURRICANES IMPACT OF DISASTER INDEBTEDNESS INDEMNITY INDEMNITY INSURANCE INFRASTRUCTURE LOANS INSTITUTIONAL INVESTORS INSTRUMENT INSURANCE INSURANCE CLAIMS INSURANCE COVERAGE INSURANCE INDUSTRY INSURANCE MARKET INSURANCE MARKETS INSURANCE PENETRATION INSURANCE POLICY INSURANCE PREMIUM INSURANCE PREMIUMS INSURANCE PRODUCTS INSURED LOSSES INSURERS INTERNATIONAL BANK INTERNATIONAL CREDIT INTERNATIONAL FINANCIAL MARKETS INVENTORY LANDSLIDES LEGISLATION LEVEL OF DEBT LEVY LINES OF CREDIT LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS LIQUIDITY CRISIS LOAN LOAN COMMITMENTS LOCAL BUSINESSES LONG-TERM RESOURCE MACROECONOMIC RISK MARKET INSTRUMENTS MATURITY MORAL HAZARD MUNICIPALITIES NATURAL DISASTER NATURAL DISASTERS NATURAL HAZARDS NEUTRALITY OPPORTUNITY COST OPPORTUNITY COSTS PLEDGES PORTFOLIO PRESENT VALUE PRINCIPAL PAYMENTS PRIVATE CAPITAL PRIVATE INVESTMENTS PRIVATE INVESTORS PROGRAMS PUBLIC ASSETS PUBLIC EXPENDITURES PUBLIC FINANCES PUBLIC INVESTMENT PUBLIC INVESTMENTS PUT OPTIONS RECAPITALIZATION RECOVERY OPERATION RECOVERY OPERATIONS REINSURANCE REINSURANCE CAPACITY REINSURANCE COMPANIES REINSURANCE MARKETS REINSURERS RELIEF RELIEF EFFORTS RELIEF OPERATION RELIEF OPERATIONS REPAYMENT REPAYMENT OF PRINCIPAL RESERVE RESERVE FUND RESERVE FUNDS RESERVES RETURN RETURNS RISK ASSESSMENT RISK AVERSION RISK CAPITAL RISK DIVERSIFICATION RISK EXPOSURE RISK INSURANCE RISK MANAGEMENT RISK MITIGATION RISK NEUTRAL RISK PREMIUM RISK PROFILE RISK REDUCTION RISK TRANSFER SAFETY SAFETY NET SAFETY NETS SECURITIES SETTLEMENT SHORT-TERM LIQUIDITY SMALL BUSINESS SUB-NATIONAL ENTITIES SWAP SYSTEMIC RISK TAX TAX ADMINISTRATION TAXATION TERM STRUCTURE OF INTEREST RATES TIDAL WAVES TOTAL DEBT TOURISM TAXES TRANSACTION TRANSACTION COSTS TRANSPORT TREASURY TREASURY BONDS TROPICAL STORMS UNDERLYING ASSET VOLCANIC ERUPTION VOLCANIC ERUPTIONS WEALTH EFFECT WESTERN EUROPE WIND SPEED
spellingShingle	ACCESS TO INSURANCE AGENTS AMOUNT OF RISK APPLICATIONS ASSET CLASS ASSET CLASSIFICATION AVALANCHES BALANCE SHEET BALANCE SHEETS BANK LOAN BANK POLICY BASIS POINT BOND BOND ISSUER BOND ISSUES BOND MARKET BONDS BORROWING CAPACITY BUSINESS INTERRUPTION INSURANCE CALL OPTION CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS CASH PAYMENT CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHES CATASTROPHIC EVENT CATASTROPHIC EVENTS CATASTROPHIC INSURANCE CATASTROPHIC LOSSES CATASTROPHIC RISKS CLAIM PAYMENT COMMERCIAL DEBT CONTINGENT DEBT CONTINGENT DEBTS COST OF CAPITAL COUNTRY RISK COVERAGE CREDIT LINE CREDIT LINES CREDIT RISK CREDITORS DAMAGE ASSESSMENT DAMAGES DEBT BURDEN DEBT OBLIGATIONS DEBT RESTRUCTURING DEBT SERVICE DEBT SERVICES DERIVATIVE DERIVATIVE TRANSACTION DEVASTATION DEVELOPING COUNTRIES DISASTER EVENT DISASTER INSURANCE DISASTER PRONE COUNTRIES DISASTER RECONSTRUCTION DISASTER RECOVERY DISASTER RISK DISASTER RISKS DISASTER SITUATION DISBURSEMENTS DISCOUNT RATE DIVERSIFIED PORTFOLIO DOMESTIC CREDIT DOMESTIC DEBT EARTHQUAKE EARTHQUAKES ECONOMIC RISK EMERGENCY ASSISTANCE EMERGENCY NEEDS EMERGENCY RECOVERY EMERGENCY RESPONSE EMERGING MARKET EMERGING MARKET COUNTRIES EXCISE TAXES EXPENDITURE EXPENDITURES EXTERNAL DEBT EXTERNALITIES FEDERAL RESERVE FEDERAL RESERVE BANK FINANCES FINANCIAL INSTRUMENT FINANCIAL INSTRUMENTS FINANCIAL MARKETS FINANCIAL SUPPORT FIRE FISCAL POLICIES FLOODING FLOODS GOVERNMENT ASSETS GOVERNMENT BUDGET GOVERNMENT CAPACITY GOVERNMENT DEFICIT GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOLDING HOUSING HURRICANE HURRICANES IMPACT OF DISASTER INDEBTEDNESS INDEMNITY INDEMNITY INSURANCE INFRASTRUCTURE LOANS INSTITUTIONAL INVESTORS INSTRUMENT INSURANCE INSURANCE CLAIMS INSURANCE COVERAGE INSURANCE INDUSTRY INSURANCE MARKET INSURANCE MARKETS INSURANCE PENETRATION INSURANCE POLICY INSURANCE PREMIUM INSURANCE PREMIUMS INSURANCE PRODUCTS INSURED LOSSES INSURERS INTERNATIONAL BANK INTERNATIONAL CREDIT INTERNATIONAL FINANCIAL MARKETS INVENTORY LANDSLIDES LEGISLATION LEVEL OF DEBT LEVY LINES OF CREDIT LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS LIQUIDITY CRISIS LOAN LOAN COMMITMENTS LOCAL BUSINESSES LONG-TERM RESOURCE MACROECONOMIC RISK MARKET INSTRUMENTS MATURITY MORAL HAZARD MUNICIPALITIES NATURAL DISASTER NATURAL DISASTERS NATURAL HAZARDS NEUTRALITY OPPORTUNITY COST OPPORTUNITY COSTS PLEDGES PORTFOLIO PRESENT VALUE PRINCIPAL PAYMENTS PRIVATE CAPITAL PRIVATE INVESTMENTS PRIVATE INVESTORS PROGRAMS PUBLIC ASSETS PUBLIC EXPENDITURES PUBLIC FINANCES PUBLIC INVESTMENT PUBLIC INVESTMENTS PUT OPTIONS RECAPITALIZATION RECOVERY OPERATION RECOVERY OPERATIONS REINSURANCE REINSURANCE CAPACITY REINSURANCE COMPANIES REINSURANCE MARKETS REINSURERS RELIEF RELIEF EFFORTS RELIEF OPERATION RELIEF OPERATIONS REPAYMENT REPAYMENT OF PRINCIPAL RESERVE RESERVE FUND RESERVE FUNDS RESERVES RETURN RETURNS RISK ASSESSMENT RISK AVERSION RISK CAPITAL RISK DIVERSIFICATION RISK EXPOSURE RISK INSURANCE RISK MANAGEMENT RISK MITIGATION RISK NEUTRAL RISK PREMIUM RISK PROFILE RISK REDUCTION RISK TRANSFER SAFETY SAFETY NET SAFETY NETS SECURITIES SETTLEMENT SHORT-TERM LIQUIDITY SMALL BUSINESS SUB-NATIONAL ENTITIES SWAP SYSTEMIC RISK TAX TAX ADMINISTRATION TAXATION TERM STRUCTURE OF INTEREST RATES TIDAL WAVES TOTAL DEBT TOURISM TAXES TRANSACTION TRANSACTION COSTS TRANSPORT TREASURY TREASURY BONDS TROPICAL STORMS UNDERLYING ASSET VOLCANIC ERUPTION VOLCANIC ERUPTIONS WEALTH EFFECT WESTERN EUROPE WIND SPEED Ghesquiere, Francis Mahul, Olivier Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
relation	Policy Research Working Paper; No. 4345
description	Economic theory suggests that countries should ignore uncertainty for public investment and behave as if indifferent to risk because they can pool risks to a much greater extent than private investors can. This paper discusses the general economic theory in the case of developing countries. The analysis identifies several cases where the government's risk-neutral assumption does not hold, thus making rational the use of ex ante risk financing instruments, including sovereign insurance. The paper discusses the optimal level of sovereign insurance. It argues that, because sovereign insurance is usually more expensive than post-disaster financing, it should mainly cover immediate needs, while long-term expenditures should be financed through post-disaster financing (including ex post borrowing and tax increases). In other words, sovereign insurance should not aim at financing the long-term resource gap, but only the short-term liquidity need.
format	Publications & Research :: Policy Research Working Paper
author	Ghesquiere, Francis Mahul, Olivier
author_facet	Ghesquiere, Francis Mahul, Olivier
author_sort	Ghesquiere, Francis
title	Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
title_short	Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
title_full	Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
title_fullStr	Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
title_full_unstemmed	Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
title_sort	sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2007/09/8268122/sovereign-natural-disaster-insurance-developing-countries-paradigm-shift-catastrophe-risk-financing http://hdl.handle.net/10986/7331
_version_	1764402340775854080
spelling	okr-10986-73312021-04-23T14:02:34Z Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing Ghesquiere, Francis Mahul, Olivier ACCESS TO INSURANCE AGENTS AMOUNT OF RISK APPLICATIONS ASSET CLASS ASSET CLASSIFICATION AVALANCHES BALANCE SHEET BALANCE SHEETS BANK LOAN BANK POLICY BASIS POINT BOND BOND ISSUER BOND ISSUES BOND MARKET BONDS BORROWING CAPACITY BUSINESS INTERRUPTION INSURANCE CALL OPTION CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS CASH PAYMENT CATASTROPHE BOND CATASTROPHE BONDS CATASTROPHES CATASTROPHIC EVENT CATASTROPHIC EVENTS CATASTROPHIC INSURANCE CATASTROPHIC LOSSES CATASTROPHIC RISKS CLAIM PAYMENT COMMERCIAL DEBT CONTINGENT DEBT CONTINGENT DEBTS COST OF CAPITAL COUNTRY RISK COVERAGE CREDIT LINE CREDIT LINES CREDIT RISK CREDITORS DAMAGE ASSESSMENT DAMAGES DEBT BURDEN DEBT OBLIGATIONS DEBT RESTRUCTURING DEBT SERVICE DEBT SERVICES DERIVATIVE DERIVATIVE TRANSACTION DEVASTATION DEVELOPING COUNTRIES DISASTER EVENT DISASTER INSURANCE DISASTER PRONE COUNTRIES DISASTER RECONSTRUCTION DISASTER RECOVERY DISASTER RISK DISASTER RISKS DISASTER SITUATION DISBURSEMENTS DISCOUNT RATE DIVERSIFIED PORTFOLIO DOMESTIC CREDIT DOMESTIC DEBT EARTHQUAKE EARTHQUAKES ECONOMIC RISK EMERGENCY ASSISTANCE EMERGENCY NEEDS EMERGENCY RECOVERY EMERGENCY RESPONSE EMERGING MARKET EMERGING MARKET COUNTRIES EXCISE TAXES EXPENDITURE EXPENDITURES EXTERNAL DEBT EXTERNALITIES FEDERAL RESERVE FEDERAL RESERVE BANK FINANCES FINANCIAL INSTRUMENT FINANCIAL INSTRUMENTS FINANCIAL MARKETS FINANCIAL SUPPORT FIRE FISCAL POLICIES FLOODING FLOODS GOVERNMENT ASSETS GOVERNMENT BUDGET GOVERNMENT CAPACITY GOVERNMENT DEFICIT GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOLDING HOUSING HURRICANE HURRICANES IMPACT OF DISASTER INDEBTEDNESS INDEMNITY INDEMNITY INSURANCE INFRASTRUCTURE LOANS INSTITUTIONAL INVESTORS INSTRUMENT INSURANCE INSURANCE CLAIMS INSURANCE COVERAGE INSURANCE INDUSTRY INSURANCE MARKET INSURANCE MARKETS INSURANCE PENETRATION INSURANCE POLICY INSURANCE PREMIUM INSURANCE PREMIUMS INSURANCE PRODUCTS INSURED LOSSES INSURERS INTERNATIONAL BANK INTERNATIONAL CREDIT INTERNATIONAL FINANCIAL MARKETS INVENTORY LANDSLIDES LEGISLATION LEVEL OF DEBT LEVY LINES OF CREDIT LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS LIQUIDITY CRISIS LOAN LOAN COMMITMENTS LOCAL BUSINESSES LONG-TERM RESOURCE MACROECONOMIC RISK MARKET INSTRUMENTS MATURITY MORAL HAZARD MUNICIPALITIES NATURAL DISASTER NATURAL DISASTERS NATURAL HAZARDS NEUTRALITY OPPORTUNITY COST OPPORTUNITY COSTS PLEDGES PORTFOLIO PRESENT VALUE PRINCIPAL PAYMENTS PRIVATE CAPITAL PRIVATE INVESTMENTS PRIVATE INVESTORS PROGRAMS PUBLIC ASSETS PUBLIC EXPENDITURES PUBLIC FINANCES PUBLIC INVESTMENT PUBLIC INVESTMENTS PUT OPTIONS RECAPITALIZATION RECOVERY OPERATION RECOVERY OPERATIONS REINSURANCE REINSURANCE CAPACITY REINSURANCE COMPANIES REINSURANCE MARKETS REINSURERS RELIEF RELIEF EFFORTS RELIEF OPERATION RELIEF OPERATIONS REPAYMENT REPAYMENT OF PRINCIPAL RESERVE RESERVE FUND RESERVE FUNDS RESERVES RETURN RETURNS RISK ASSESSMENT RISK AVERSION RISK CAPITAL RISK DIVERSIFICATION RISK EXPOSURE RISK INSURANCE RISK MANAGEMENT RISK MITIGATION RISK NEUTRAL RISK PREMIUM RISK PROFILE RISK REDUCTION RISK TRANSFER SAFETY SAFETY NET SAFETY NETS SECURITIES SETTLEMENT SHORT-TERM LIQUIDITY SMALL BUSINESS SUB-NATIONAL ENTITIES SWAP SYSTEMIC RISK TAX TAX ADMINISTRATION TAXATION TERM STRUCTURE OF INTEREST RATES TIDAL WAVES TOTAL DEBT TOURISM TAXES TRANSACTION TRANSACTION COSTS TRANSPORT TREASURY TREASURY BONDS TROPICAL STORMS UNDERLYING ASSET VOLCANIC ERUPTION VOLCANIC ERUPTIONS WEALTH EFFECT WESTERN EUROPE WIND SPEED Economic theory suggests that countries should ignore uncertainty for public investment and behave as if indifferent to risk because they can pool risks to a much greater extent than private investors can. This paper discusses the general economic theory in the case of developing countries. The analysis identifies several cases where the government's risk-neutral assumption does not hold, thus making rational the use of ex ante risk financing instruments, including sovereign insurance. The paper discusses the optimal level of sovereign insurance. It argues that, because sovereign insurance is usually more expensive than post-disaster financing, it should mainly cover immediate needs, while long-term expenditures should be financed through post-disaster financing (including ex post borrowing and tax increases). In other words, sovereign insurance should not aim at financing the long-term resource gap, but only the short-term liquidity need. 2012-06-06T20:21:08Z 2012-06-06T20:21:08Z 2007-09 http://documents.worldbank.org/curated/en/2007/09/8268122/sovereign-natural-disaster-insurance-developing-countries-paradigm-shift-catastrophe-risk-financing http://hdl.handle.net/10986/7331 English Policy Research Working Paper; No. 4345 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research

Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing

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