Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing, Vol. 1 of 1

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Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing

Author:	Ghesquiere, Francis; Mahul, Olivier;	Collection Title:	Policy Research working paper ; no. WPS 4345
Country:	World;	Date Stored:	2007/09/10
Document Date:	2007/09/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	The World Region
Report Number:	WPS4345	SubTopics:	Debt Markets; Banks & Banking Reform; Hazard Risk Management; Insurance & Risk Mitigation; Natural Disasters
Volume No:	1 of 1

Summary: 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.


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