Swiss Re notes that the “increasing severity and frequency of natural catastrophes are driving up the cost of disaster relief, especially in developing and emerging markets as they are hurt the most and prepared the least.”
In a new publication, launched today at the WEF summit in Davos, the reinsurer calls for an increased role for “public-private partnerships” that could “substantially ease” the increasing costs of disaster relief efforts, and take some of the pressure off of the budgets of countries that are hit by them.
Swiss Re notes that “economic costs of natural catastrophes have risen from an average $25 billion per annum in the 1980s to $130 billion in the 2000s. With climate change unfolding, catastrophic events such as hurricanes, floods and droughts are likely to increase further, hitting in particular emerging markets and developing countries.”
As examples it cited Hurricane Ivan, which struck Grenada in 2004, causing economic losses amounted to $889 million, “i.e. a staggering 203 percent of the Caribbean island state’s gross domestic product (GDP). One year later, the country defaulted on its foreign debt.” More recently, the economic losses from the earthquake in Haiti “stood at 114 percent of GDP.”
Michel Liès, Chairman Global Partnerships at Swiss Re, explained: “The mounting exposure to catastrophes calls for a more diversified approach in financing disaster relief.” Up until now disaster risk management has primarily focused on “post-event relief, rehabilitation and reconstruction.” Swiss Re points out that a “more balanced approach is preferable, combining both pre- and post-event elements. As a first priority, governments should ensure a functioning insurance market through appropriate legislation.
“This will help to absorb a big part of disaster losses suffered by individuals and businesses. Then, governments should consider pre-event financing solutions that build up reserves, as well as contingent finance and sovereign insurance solutions. Post disaster financing of relief, rehabilitation and reconstruction through budgetary means, debt financing or donor aid should only come into play to cover residual losses once all other risk transfer solutions have been exhausted.”
One of the best examples is the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which, as Swiss Re explains, “insures 16 Caribbean countries and territories against earthquakes and hurricanes. CCRIF works like an insurance mutual, combining the benefits of pooled reserves from participating governments with the capacity of the financial markets. It retains some of the risks insured by the member governments and transfers the remainder to reinsurance markets. Together with others, Swiss Re is supporting CCRIF as the lead reinsurer.
Swiss Re has long advocated making use of the financial markets to transfer risks, and it sees a similar role in tackling the impact of natural disasters. Liés noted: “Through its involvement in numerous public-private partnerships, Swiss Re has the track record demonstrating that it can effectively support governments in tackling the financial implications of natural catastrophes and make these societies more resilient in the face of adversity.”
He stressed, however, that “financial risk transfer should not be looked at in an isolated way. An integrated and structured risk management approach should be undertaken that includes a thorough analysis of the risk landscape. This enables political and public sector decision-makers to determine the priorities in advance and to allocate scarce resources accordingly. A comprehensive approach allows governments to minimize risks wherever possible, transfer the costs of peak risks, such as natural catastrophes, where necessary and thus maintain long-term financial health of their countries.”
Source: Swiss Re
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