## For the Caribbean, building resilience is a matter of survival

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### High vulnerability and recent shocks
- Many Caribbean countries are among the 25 most vulnerable nations in terms of disasters per capita or land area.
- Since 1950, 511 disasters worldwide have hit small states (developing economies with populations of less than 1.5 million).
- Of these 511 disasters, 324 were in the Caribbean.
- These disasters killed 250,000 people and affected more than 24 million through injury and loss of homes and livelihoods.
- The Caribbean’s average estimated disaster damage as a ratio to GDP was:
  - 4.5 times greater for small states than for larger ones,
  - six times higher for countries in the Caribbean (compared with larger states).
- The region is seven times more likely to be hit by natural disasters than larger states and twice as likely as other small states.
- The economic cost for the Caribbean exceeded $22 billion (in constant 2009 dollars) between 1950 and 2016, compared with $58 billion for similar disasters globally.
- Country-specific extreme impacts:
  - Hurricane Maria is estimated to have cost Dominica 225 percent of its GDP.
  - Hurricane damage for Grenada in 2004 was 200 percent of GDP.

### Economic and human consequences
- Disasters cause lost income and destruction of physical and human capital, infrastructure, and property.
- Rebuilding can provide a temporary boost, but indirect effects can spread and undermine investment, growth, and macroeconomic performance.
- Debt dynamics worsen as governments borrow to finance recovery while growth slows.
- Analysis of 12 Caribbean countries with the largest damage costs relative to GDP since 1950 found:
  - Most countries experienced reduced growth in the year of a disaster and recovered in the subsequent year.
  - Fiscal deficits increased in 7 of 12 countries.
  - Current accounts deteriorated.
  - Debt-to-GDP ratios surged; in some countries debt continued to rise, indicating frequent disasters interrupt efforts to sustain strong growth and improve public finances.
- Large shares of the region’s population live in high-risk areas with weak infrastructure; economies rely heavily on tourism and agriculture, increasing vulnerability to weather-sensitive shocks.
- Recurrent floods, droughts, hurricanes, and rising sea levels threaten agriculture and coastal areas and increase the risk of water and food insecurity.
- Climate-related disasters encourage migration, exacerbating brain-drain risks for growth.

### Prevention and preparedness: cost-effectiveness and measures
- Preparing for disasters is generally more cost-effective than responding after the fact.
- Priority actions for adaptation and resilience include:
  - Assessing the likelihood and potential impact of disaster and climate change risks and integrating them into policy frameworks.
  - Information campaigns and early warning systems.
  - Investing in disaster-resilient infrastructure.
  - Enforcing land-use and zoning rules to limit deforestation and coastal exposure.
  - Ensuring appropriate building standards.
- Where risk cannot be averted, invest in measures to lessen disaster impact:
  - Self-insurance by building fiscal cushions to protect against small but unpredictable financing needs; fiscal rules can sustain buffers and guide policy.
  - Insurance and hedging tools to pool risk for moderate disasters, requiring deeper financial markets to facilitate risk pooling and expand insurance markets.
  - Innovative risk-sharing tools, including parametric insurance and risk pooling, to provide quick relief and share high costs among countries.

### Risk-financing instruments and examples
- Regional and market instruments discussed:
  - Caribbean Catastrophe Risk Insurance Facility (CCRIF) allows governments to limit financial impact by providing quick liquidity after major disasters.
  - Catastrophe bonds (cat bonds) transfer risk to markets in exchange for generous regular payments (coupons) and allow issuers to forgo repayment of principal if there is a major disaster.
  - Contingent lines of credit with bilateral, multilateral, and commercial creditors put financing in place before disaster strikes.
  - The World Bank Catastrophe Draw-Down Option offers immediate access to funds after declaration of a state of emergency; used in Latin America but not yet in the Caribbean, partly because of cost and stigma associated with borrowing.
- Insurance coverage limitations:
  - Insurance coverage remains low due to high cost, shallow markets, limited competition, or exclusions in contracts.
  - In Belize and Grenada, insurance covered only 4.5 percent of the total damage in a recent large disaster.
- Market limitations:
  - Pooling risk across other small states globally could reduce premiums by reflecting a lower probability that all countries will be hit by the same shock.
  - The cat bond market for very large disasters is small and shallow, making cat bonds too expensive for a single country.

### Barriers to preparedness and financing constraints
- Persistent underinvestment in risk reduction and prevention stems from:
  - Limited funds for preparation given complex eligibility and disbursement criteria, information gaps, and absence of coherent access plans in low-capacity environments.
  - High cost and limited availability of adequate insurance coverage.
  - Countries often cannot afford higher insurance coverage; payouts from CCRIF have been small relative to costs.
  - Most Caribbean countries have attained middle- or high-income status and do not qualify for concessional financing under existing eligibility criteria.
  - Financing facility limits are typically low compared with the massive damages incurred.

### Policy recommendations and international support
- National policy priorities:
  - Integrate disaster and climate-change risk assessments into policy frameworks.
  - Prioritize information systems, early warning, resilient infrastructure, land-use enforcement, and building standards.
  - Build fiscal cushions and adopt fiscal rules to sustain buffers.
  - Develop markets for insurance and hedging tools, and establish contingency funds and contingency financing arrangements.
- Regional and international actions:
  - Strengthen the Caribbean Catastrophe Risk Insurance Facility to broaden its capital base and membership and lower insurance premiums.
  - Link reduced premiums to countries’ concerted efforts to prepare and reduce risk.
  - The international community can assist by helping policymakers design systems to assess risk; develop affordable insurance and hedging markets; improve access to financing for preparation; and strengthen and diversify economies to absorb disaster impacts.
- Guiding principle:
  - Disaster financing should reduce vulnerability and build resilience while rewarding preparation and risk reduction, avoiding measures that exacerbate cycles of high debt and low growth.

*İnci Ötker and Krishna Srinivasan, Finance & Development, March 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/march/otker.pdf_