Kazuko Ishigaki, Risk Knowledge Economist United Nations Office for Disaster Risk Reduction Geneva, Switzerland

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Kazuko Ishigaki, Risk Knowledge EconomistUnited
Nations Office for Disaster Risk
ReductionGeneva, Switzerland
Disaster losses and Economic Consequences
Toward Comprehensive Risk
Finance Strategy
The First Arab Regional Conference for
Disaster Risk Reduction Aqaba, Jordan 20,
March, 2013
www.unisdr.org
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Contents

• Need for Comprehensive Risk Finance Strategy
• Risk Management Tools for Private Sector and
  Government
• To Prepare for Probable Maximum Disaster
• Process of evidence-based decision making
• Conclusion

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The Need for Comprehensive Risk Financing Strategy

• Background
• 1 Increase/intensification of disaster
• ? interruption or slow down to economic
  growth
• e.g. Pakistan GDP growth estimate

e.g. Simulation of economic growth and
cyclone exposure
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The Need for Comprehensive Risk Financing Strategy

• Background
• 2. Economic growth ? increase of economic loss
  in the event of disaster

e.g. Annual Average Losses from cyclonic wind by
risk class
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The Need for Comprehensive Risk Financing Strategy

• Background
• 3. Constrained public finance

Source IMF (2012)
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The Need for Comprehensive Risk Financing Strategy

• Background
• 4. Constrained public investment
• - Investment vs consumption
• 5. Increasing importance of private investment
• - Public/Private investment share
• OECD 16 84
• Developing countries 30-40 60-70

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The Need for Comprehensive Risk Financing Strategy

• Challenges and Options
• A To decrease economic loss in the event of
  disaster
• ?Invest in disaster risk reduction and
  preparedness
• B To finance the response/recovery/reconstruction
  after disaster
• ?Transfer risk and/or pool money
• Both require ex-ante financing under tight budget
  constraint
• ? Need for Comprehensive Risk Financing
  Strategy

Q1 How much money should be allocated to
comprehensive risk financing? (size of
total pie) Q2 What is the most efficient and
effective allocation of money between
option A (risk reduction) and B (risk transfer
and risk retention)? (how to divide the pie)
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Risk Management Tools for Business and Household
Risk reduction Risk reduction Risk finance Risk finance
Risk avoidance Risk mitigation Risk transfer Risk retaining
Business No business in hazard prone area Diversifying business location Improving resiliency of offices etc Crafting BCP Buying insurance Issuing cat bonds Setting allowance for contingency Establishing captive companies
Household No housing in hazard prone area Improving resiliency of housings Buying insurance Dedicated savings in the event of disaster
Insurance companies Selecting risks which can be insured Providing buyers with DRR incentive (e.g. premium setting linked to risk level) Buying reinsurance Issuing cat bonds Setting deductible and liability limit
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Government Policy for Comprehensive Risk Finance
(1) To affect private corporations and households
Precondition Risk assessment Hazard mapping Information sharing and education Risk assessment Hazard mapping Information sharing and education Risk assessment Hazard mapping Information sharing and education Risk assessment Hazard mapping Information sharing and education
Individual methods Risk reduction Risk reduction Risk finance Risk finance
Individual methods Risk avoidance Risk mitigation Risk transfer Risk retaining
Individual methods Land use planning Helping relocation Establishing early warning system Helping evacuation planning Infrastructure investment in DRR Critical infrastructure protection Establishing building code Helping BCP Providing incentive for insurance Providing incentive for Issuing bonds Providing incentive for reserve establishment
Responsibility Sectoral ministries/DM agency Sectoral ministries/ DM agency
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Government Policy for Comprehensive Risk Finance
(2) To assure business continuity of government
Precondition Risk assessment Hazard mapping Information sharing and education Risk assessment Hazard mapping Information sharing and education Risk assessment Hazard mapping Information sharing and education Risk assessment Hazard mapping Information sharing and education
Individual methods Risk reduction Risk reduction Risk finance Risk finance
Individual methods Risk avoidance Risk mitigation Risk transfer Risk retaining
Individual methods No government offices, important public asset and facility in hazard prone area Critical Infrastructure protection Response plan Government BCP Buying insurance Issuing bonds Establishing reserve Contingency credit contract
Responsibility Sectoral ministries/DM agency Ministry of Finance/DM agency
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To prepare for probable maximum disaster
PML
(loss)
PML
Uncertainty We do not know when the disaster
occurs
Intensive Risk
AAL
Extensive Risk
Year
Along With adequate annual investment for DRR to
cover AAL, it is necessary to financially
prepare for probable maximum disaster
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To prepare for probable maximum disaster
Which sector covers which layer of risk?
Frequency
First loss Excess loss
USA (FHCF) Japan Private Government
Extensive Risk
Layer A
Intensive Risk
Layer B
Layer C
Economic loss
First loss Excess loss
NZ (EQC) Turkey (TCIP) USA (NFIP) Government (the public) Private
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Process of evidence-based decision making
Risk
STEP1 Produce risk (annual average loss
probable maximum loss) estimate. STEP2 Choose
the return period to cover political
decision STEP3 Define the expected level of
DRR political decision
STEP4 Measure the impact of policy tools on DRR
(avoided economic loss)
Policy
Reduced Disaster Risk
How much impact on reducing loss?
Public Investment
Subsidy
Tax
Regulation
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STEP4 how to measure the impact of policy on
DRR?
Cost Benefit Analysis Disaster Impact Analysis
Preconditions Past disaster loss data Vulnerability data Construction standard Past disaster loss data Vulnerability data Construction standard
Principle If the present value of benefit is equal to or more than 1, invest. The higher C/B ratio, the more preferable the project is. Before the project implementation, analyze and measure the disaster impact of the project and/or project impact on disaster. If the negative impact is measured, include the mitigation cost in the total project cost.
Methodological problems (examples) How to assign monetary value to saved life? How to assign monetary value to avoided loss? Same as CBA
Institutional Problems (examples) Who does the analysis? Administrative burden Same as the CBA Enforcement
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Process of evidence-based decision making
STEP5 Check the gap between the expected level
of DRR and current level of
DRR STEP6 Decide how to do with the
gap implement more DRR or transfer risk?
political decision
Policy
Ideal
AAL
Reality
Investment
Regulation etc
Transfer
Retain
DRR
Investment
Regulation etc
Retain
Transfer
???
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STEP5 (related) Main Challenges in DRR
Investment TrackingLessons from the recent
studies

• (Main methodological challenges)
• How to count embedded DRR investment? (e.g.
  water management)
• How to separate DRR from reconstruction
  investment? (e.g. subsidy for housing relocation
  after disaster)
• How to measure private sector investment, for
  example, PPP?
• How to measure local government investment? (for
  example, many project are co-financed by national
  and local governments)
• How to make the tracking comparable across
  countries and along time? (e.g. common or
  comparable definition of DRR, counting method)
• It requires additional administrative burden on
  government

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STEP5 (related) Main Challenges in DRR
Investment TrackingLessons from the recent
studies

• DRR budget of DM Agency easy to identify
• Main DRR tools embedded in sectoral budgets
• DRR Infrastructure investment
• - 100 for DRR (not embedded)
• e.g. coastal levees
• - x for DRR (embedded but separable)
  ?sub-category of budget item
• e.g. emergency train stop equipment
  for train
• - multiple purpose including DRR
  (completely embedded)
• e.g. multi purpose dam,
  meteorological monitoring

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STEP5 (related) Critical infrastructure US and
UK definition
US UK
Agriculture and Food Food
Defense industrial base
Energy Energy (oil, gas, electricity)
Healthcare and public health Health
National monuments and icons
Banking and finance Financial services
Water Water
Chemical
Commercial facilities
Critical manufacturing
Dams
Emergency services Emergency services (police, fire, ambulance, coastguard)
Nuclear reactors, materials and waste
IT communications Communications (telecom, post, broadcast)
Postal and shipping Communications (telecom, post, broadcast)
Transportation system Transportation (highways, rail, ports, aviation)
Government facilities including schools Government
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Conclusion Toward comprehensive risk finance
strategy

• (1) Constructing information and knowledge
  base is essentially important.
• Not only hazard risk information but also
  disaster loss and vulnerability information is
  necessary as a fundamental base for sound policy
  making
• Ensure that information leads to implementation
  measuring the impact of policy on DRR would
  bridge the risk information, vulnerability
  information and government coping capacity
  information, and facilitate the DRR investment
  implementation.
• (2) Better governance building is necessary.
• In addition to traditional DM agency, MOF and
  Planning Authority should be key stakeholders.
• Sectoral ministries, especially Ministry which
  has responsibility for infrastructure building,
  are also important stakeholders.
• Private sector, especially insurance sector and
  construction sector, had better be mobilized for
  cooperation.

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• DRR mitigates disaster loss and negative economic
  consequences

Conclusion Toward comprehensive risk finance
strategy
e.g. Pakistan GDP growth estimate
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Thank you
Contact Kazuko Ishigaki United Nations Office
for Disaster Risk Reduction Tel [phone]
3460ishigaki_at_un.org