Building financial resilience - the role of risk transfer for sovereign disaster risk management

Esther Baur, Martyn Parker

Abstract


Every year natural catastrophes cause massive human and financial losses around the world. Economic costs of natural catastrophes have clearly increased in the last two decades. The first priority for decision makers it to reduce risk to save human lives and to reduce potential damage to properties and infrastructure. Prevention, mitigation and risk avoidance are the most important priorities for disaster management. But not all risks can be avoided, so preparing for disasters is indispensable. Financial strategies for disaster risk management are necessary to ensure that individuals, businesses and governments have the financial resources necessary to deal with the adverse financial and economic consequences of disasters. Financial preparedness is a critical component of sovereign disaster risk management as it enables the critical funding of disaster response, recovery and reconstruction. Insurance instruments which help countries cope with financial needs resulting from natural disasters have received increasing attention in recent years. Moreover new, innovative approaches have been developed around the world to secure contingent funding before an event happens. By putting a price tag on risks, insurance also incentivizes prevention measures and provides a basis to compare costs and benefits of different measures. This article will focus on why financial resilience is a critical component of sovereign disaster risk management, what role risk transfer mechanisms can play – with a particular emphasis on sovereign risk transfer solutions - and what is needed for an integrated country risk management approach which includes financing considerations.

Keywords


disaster risk financing, sovereign risk financing, disaster insurance, financial resilience, integrated disaster risk management

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