## _wp04224

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### I. Introduction
- Definition of natural disasters used:
  - Events due to natural causes that led to 10 or more fatalities, affected 100 or more people, or resulted in a call for international assistance or the declaration of a state of emergency.
- Data source and scope:
  - Central data source: EM-DAT database compiled by the Centre for Research on the Epidemiology of Disasters (CRED, 2004).
  - EM-DAT contains information on 14,535 natural disasters since 1900, including estimates of the number of people affected and the value of damage.
  - According to EM-DAT, since 1970 natural disasters have affected more than 5 billion people and have caused more than $1 trillion in damage.
- Comparison dimensions across countries:
  - (a) number of events divided by land area;
  - (b) number of events divided by population;
  - (c) number of affected persons divided by total population;
  - (d) damage divided by GDP.

### II. Incidence of Natural Disasters
- General trends and drivers:
  - Three times as many disasters were recorded in the 1990s as in the 1970s.
  - Two fundamental reasons cited:
    - increased concentration of population in high-risk areas;
    - increase in the frequency and intensity of extreme weather events (linked to rise in mean global surface temperatures).
- Global and developing-country patterns (1970–2002):
  - Of the more than 6,000 natural disasters recorded during 1970–2002, three-fourths of the events and 99 percent of the people affected were in developing countries.
  - In developing countries natural disasters have, on average, affected over 2 percent of the population each year and caused more than one half of 1 percent of GDP in damage. Both figures are about 10 times greater than in advanced economies.
- Small island states and ECCU exposure:
  - Small island states tend to have the highest frequency of natural disasters when measured relative to land area or population.
  - The Eastern Caribbean Currency Union (ECCU) stands out owing to the large number of hurricanes.
  - For the six ECCU countries that are Fund members, wind storms caused 34 of the 44 natural disasters recorded since 1970.
  - On average a natural disaster occurred once every four and a half years in each of the six ECCU countries.
  - Considering only incidents that affected at least 2 percent of a country’s population or inflicted damage of at least 2 percent of GDP:
    - Such events occur in the individual countries once every nine years.
    - Such events occur in the region once every two and a half years.
  - Among these large disasters in the ECCU:
    - Median number of affected persons amounted to 9 percent of the country’s population.
    - Median value of damage was equivalent to 14 percent of the country’s annual GDP.
  - Average cumulative damage in the ECCU was equivalent to 66 percent of annual GDP, compared to a worldwide average of 21 percent.
  - Average per capita GDP in the six ECCU countries was US$5,500 in 2002, compared with US$1,400 for the 20 most vulnerable countries based on the percentage of the population affected.

### III. Determinants and Cross-Country Analysis
- Regression findings summarized:
  - Clear negative relationship between income and the number of persons affected by natural disasters: higher per capita income is associated with a lower percentage of population affected.
  - Regressing percentage of population affected on number of disasters per population and on per capita income produces highly significant coefficients with expected signs.
  - Relative magnitude of damage (damage divided by GDP) does not appear to depend on the level of income; frequency of events per capita shows a consistently significant coefficient for damage.
  - Measure of frequency based on dividing the number of events by population is associated with a more significant coefficient than the one based on dividing by land area.
  - Neither the share of agriculture in GDP nor the investment-to-GDP ratio appears to have a significant impact on the number of affected persons or the value of damage in the reported regressions.

### IV. Macroeconomic Implications
- Sources of economic loss:
  - Direct cost from loss of assets (EM-DAT measure of damage).
  - Disruption of economic activity leading to loss of income.
  - Macroeconomic spillovers: fiscal and external pressures causing imbalances, potential economic crises, and increases in poverty and social unrest.
- Short- and medium-term impacts (ECCU large disasters sample):
  - Sample: 12 natural disasters in the ECCU since 1970 with damage estimates exceeding 2 percent of GDP.
  - Median impacts associated with these 12 disasters:
    - Reduction in same-year real GDP growth of 2.2 percentage points.
    - Large decline in agricultural production.
    - Offsetting increase in investment.
    - Median increase in the current account deficit equal to 10.8 percent of GDP.
    - Median public debt-to-GDP ratio increased sharply by a cumulative 6.5 percentage points over three years.
  - Central government finances after large disasters:
    - Marked increase in expenditure.
    - Small reduction in total revenue (including grants) despite increased inflows of official assistance and aid.
- Example: Hurricane David (Dominica, 1979):
  - Winds in excess of 130mph; killed 42 people.
  - Damaged 95 percent and completely destroyed 12 percent of buildings; damaged or destroyed the entire banana crop and 75 percent of the country’s forests; rendered virtually the entire population homeless; temporary exodus of about a quarter of the population.
  - Consequences:
    - GDP plummeted by 17 percent.
    - Central government current expenditure increased by 31 percent.
    - Fiscal deficit increased from 3.1 percent of GDP in 1978 to 8.1 percent of GDP in 1981 despite a sizable increase in foreign grant receipts.

### V. Policy Implications and Mitigation Strategies
- Insurance and market mechanisms:
  - Market insurance mechanisms are the ideal approach to managing natural disaster risk, but the market for natural disaster insurance is not well developed and is largely absent in many developing countries.
- Alternatives and complements:
  - Self-insurance by generating public savings in good times to cover potential increases in expenditure after natural disasters.
  - More appropriate building practices and preventive measures to substantially lessen exposure to natural hazards.
  - Increased preparedness and improved governance can affect reported human costs and resilience.
- Fiscal policy guidance:
  - Tighter fiscal policy during good times would leave more room for emergency expenditure increases.
  - For countries with very high debt levels, precautionary savings may be better used to pay down existing debt.
- Administrative preparedness:
  - Prepare emergency procedures and social safety nets; accumulate contingency funds (example: Eastern Caribbean Central Bank fiscal reserve account).

### Box 1 — Review of Literature on Macroeconomic Implications of Natural Disasters
- Immediate macroeconomic impacts:
  - Natural disasters typically associated with an immediate contraction in economic output.
  - Impact on same-year GDP growth ranges from very small to 20 percentage points or more (example: Dominica in 1979).
  - Representative findings:
    - Auffret (2003a): 1 percent of GDP in direct damage reduced same-year GDP growth by 0.5 percentage point.
    - Charvériat (2000): median damage 3 percent of GDP; same-year GDP growth fell in 28 of 35 events, with an overall median reduction of 1.7 percentage points.
    - Crowards (2000b): same-year GDP growth fell by an average of 3.1 percentage points following 21 major disasters.
  - Evidence beyond contemporaneous impact is mixed; some studies find no significant long-term effect.
- External and fiscal balance effects:
  - Disasters often increase imports and reduce exports.
  - ECLAC (2000): 42 large events in Latin America and the Caribbean were, on average, associated with a deterioration in the balance of payments equal to about one-third of estimated damage.
  - IMF (2003): five large exogenous shocks in Africa were associated with same-year increases in fiscal deficits of up to 3 percent of GDP.
- Distributional effects:
  - Poor households disproportionately affected due to location, housing quality, fewer assets, and limited credit access.
- ECCU median changes (change from year -1 to year 0, Figure 3):
  - Current Account Deficit (% of GDP): +10.8
  - Imports (Goods & Services, % of GDP): +12.7
  - Exports (Goods & Services, % of GDP): -4.9
  - Public Consumption (% of GDP) 2/: +2.2
  - Public Investment (% of GDP) 2/: +1.3
  - Agricultural Production (% change) 1/: -11.1
  - Central Gov. Revenue (% of GDP): -0.3
  - Central Gov. Deficit (% of GDP): +1.0
  - Change in Public Debt (% of GDP) 3/: +1.8
  - Official Assistance and Aid (% of GDP): +0.7
  - Investment (% of GDP) 2/: +2.9
  - Change of median from year -1 to year 0: -2.2
- Long-term effects and cross-country evidence:
  - Potential long-term channels: environmental damage to agriculture, destruction of schools, crowding out of productive capital expenditure, increased indebtedness, possible inflation and financial crises.
  - Empirical evidence on long-term effects is inconclusive: Benson and Clay (2003b) find negative impact on long-term growth; World Bank (2003) finds no significant impact.
- Volatility observations:
  - Caribbean exhibits very high consumption volatility; evidence on income volatility is mixed.
  - Cashin (2004): filtering out business-cycle effects dramatically increases the volatility of real GDP growth in the ECCU relative to other countries.
  - Factors contributing to high consumption volatility: limited insurance use, absence of counter-cyclical fiscal policy, and generally high volatility in small states.

### Box 2 — New Instruments for Dealing with Natural Hazard Risk
- Capital-market instruments and catastrophe risk transfer:
  - Catastrophe bonds (cat bonds), exchange-traded catastrophe options, catastrophe swaps, and weather derivatives are instruments to transfer catastrophe risk.
  - Cat bonds offer high yields but are subject to default if a covered catastrophe occurs during the life of the bond.
  - Securitization spreads risk over a larger number of investors; example government application ties bond payoffs to objective criteria such as wind speed or flood height.
  - Status: cat bonds and similar instruments are still in their infancy and have so far been used only in developed countries.
- Insurance market shortcomings in developing countries and the ECCU:
  - Latin America and the Caribbean had only 3.9 percent of 1985–99 natural disaster damage covered by insurance, compared with 34.5 percent in North America.
  - ECCU specifics:
    - Total property insurance premiums in the ECCU are about 2.4 percent of GDP compared with 3.3 percent in the U.S.
    - Base property insurance rates in the ECCU countries are about double the rate prevailing in less hurricane-exposed cities in the United States.
    - Expense ratios of local insurance companies in the Eastern Caribbean are 30-40 percent of premium income, compared with the U.S. average of 26-28 percent.
    - About 80 percent of gross property insurance premiums are transferred to reinsurers.
    - Example volatility: annual cost of insurance rose from 0.4 percent of insured value in 1990 to 1.3 percent in 1994, and declined to 0.7 percent in 1998.
    - Insurance coverage highly uneven; majority relates to large commercial businesses, many private dwellings uninsured.
    - WINCROP provides cover only against about 20 percent of losses but has helped growers rehabilitate quickly.
- Domestic public policy recommendations:
  - Improve insurance market functioning; insure government property more widely; consider cat bonds or other financial innovations.
  - Encourage wider insurance of dwellings and crops, particularly in low-income communities.
  - Strengthen financial regulation to improve insurance products.
  - Invest in modest risk-reduction measures and enforce building codes and zoning regulation.
  - Example estimate: investments of US$40 billion in disaster preparedness, prevention, and mitigation would have reduced global economic losses in the 1990s by US$280 billion (Freeman et al., 2003).
  - Administrative and financial preparedness: prepare emergency procedures and social safety nets; save annually an amount equal to the expected cost of disasters.
  - ECCB fiscal reserve account: contributions mandatory, automatically deducted from profits owed to each member country; currently holds about EC$12 million and has never been used in relation to a natural disaster.
- International assistance and IMF instruments:
  - IMF instruments: emergency assistance for natural disaster (EAND), compensatory financing facility, stand-by arrangements, and PRGF arrangements.
  - EAND has been used 27 times since 1962.
  - EAND is relatively quick (usually within two or three months), with relatively little conditionality, and can act as a catalyst for other donor flows.
  - Available EAND resources limited: total financing given in the six cases where ECCU countries accessed EAND was only US$16 million, less than 2 percent of the estimated damage.
  - Regional programs:
    - Caribbean Development Bank (CDB): disbursed US$50 million in loans for 27 operations during 1998–2001.
    - World Bank: disbursed more than US$30 million in the region during 1998–2001.
    - Caribbean Disaster Emergency Response Agency (CDERA): established in 1991 to provide immediate, coordinated response.

### Key summary findings (selected points)
- On average, natural disasters affect about 2 percent of a country’s population each year and cause damage amounting to well over one-half of 1 percent of GDP.
- Incidence concentrated in developing countries; ECCU countries among the most vulnerable in the world in terms of frequency of events.
- Typical macro effects: immediate contraction in economic output, worsening of external and fiscal balances, and an increase in poverty; effects are pronounced in the ECCU.
- Insurance plays a limited role in developing countries; ECCU insurance market characterized by high expense ratio, high fragmentation, high volatility, and a small capital base.
- Modest preventive investments and tighter fiscal policy in good times can substantially mitigate impacts.

*Source: _wp04224 - References (extracted content).*

### References..............................................................................................................

### _wp04224 - References

### I. Introduction
- Natural disasters are defined here as events due to natural causes that led to 10 or more fatalities, affected 100 or more people, or resulted in a call for international assistance or the declaration of a state of emergency.
- The central data source is the EM-DAT database compiled by the Centre for Research on the Epidemiology of Disasters (CRED, 2004).
- EM-DAT contains information on 14,535 natural disasters since 1900, including estimates of the number of people affected and the value of damage.
- According to EM-DAT, since 1970 natural disasters have affected more than 5 billion people and have caused more than $1 trillion in damage.
- The paper compares countries along four dimensions: (a) number of events divided by land area; (b) number of events divided by population; (c) number of affected persons divided by total population; and (d) damage divided by GDP.

### II. Incidence of Natural Disasters
- General trends and drivers
  - Natural disasters are becoming much more common: three times as many disasters were recorded in the 1990s as in the 1970s.
  - Two fundamental reasons cited: increased concentration of population in high-risk areas; increase in the frequency and intensity of extreme weather events (linked to rise in mean global surface temperatures).
- Global and developing-country patterns (1970–2002)
  - Of the more than 6,000 natural disasters recorded during 1970–2002, three-fourths of the events and 99 percent of the people affected were in developing countries.
  - In developing countries natural disasters have, on average, affected over 2 percent of the population each year and caused more than one half of 1 percent of GDP in damage. Both figures are about 10 times greater than in advanced economies.
- Small island states and ECCU exposure
  - Small island states tend to have the highest frequency of natural disasters when measured relative to land area or population.
  - The Eastern Caribbean Currency Union (ECCU) stands out owing to the large number of hurricanes.
  - For the six ECCU countries that are Fund members, wind storms caused 34 of the 44 natural disasters recorded since 1970.
  - On average a natural disaster occurred once every four and a half years in each of the six ECCU countries.
  - Considering only incidents that affected at least 2 percent of a country’s population or inflicted damage of at least 2 percent of GDP:
    - Such events occur in the individual countries once every nine years.
    - Such events occur in the region once every two and a half years.
  - Among these large disasters in the ECCU:
    - The median number of affected persons amounted to 9 percent of the country’s population.
    - The median value of damage was equivalent to 14 percent of the country’s annual GDP.
  - Average cumulative damage in the ECCU was equivalent to 66 percent of annual GDP, compared to a worldwide average of 21 percent.
  - Average per capita GDP in the six ECCU countries was US$5,500 in 2002, compared with US$1,400 for the 20 most vulnerable countries based on the percentage of the population affected.

### III. Determinants and Cross-Country Analysis
- Regression findings summarized
  - A clear negative relationship is found between income and the number of persons affected by natural disasters: higher per capita income is associated with a lower percentage of population affected.
  - Regressing percentage of population affected on number of disasters per population and on per capita income produces highly significant coefficients with expected signs.
  - The relative magnitude of damage (damage divided by GDP) does not appear to depend on the level of income; frequency of events per capita shows a consistently significant coefficient for damage.
  - The measure of frequency based on dividing the number of events by population is associated with a more significant coefficient than the one based on dividing by land area.
  - Neither the share of agriculture in GDP nor the investment-to-GDP ratio appears to have a significant impact on the number of affected persons or the value of damage in the regressions reported.

### IV. Macroeconomic Implications
- Sources of loss
  - Direct cost from loss of assets (EM-DAT measure of damage).
  - Disruption of economic activity leading to loss of income.
  - Macroeconomic spillovers: fiscal and external pressures causing imbalances, potential economic crises, and increases in poverty and social unrest.
- Short- and medium-term impacts (ECCU large disasters sample)
  - The 12 natural disasters in the ECCU since 1970 with damage estimates exceeding 2 percent of GDP were analyzed for dynamic impact.
  - Median impacts associated with these 12 disasters:
    - Reduction in same-year real GDP growth of 2.2 percentage points.
    - Large decline in agricultural production.
    - Offsetting increase in investment.
    - Median increase in the current account deficit equal to 10.8 percent of GDP.
    - Median public debt-to-GDP ratio increased sharply by a cumulative 6.5 percentage points over three years.
  - Central government finances after large disasters showed large variation, but the tendency was:
    - Marked increase in expenditure.
    - Small reduction in total revenue (including grants) despite increased inflows of official assistance and aid.
- Example: Hurricane David (Dominica, 1979)
  - Winds in excess of 130mph; killed 42 people.
  - Damaged 95 percent and completely destroyed 12 percent of buildings; damaged or destroyed the entire banana crop and 75 percent of the country’s forests; rendered virtually the entire population homeless; temporary exodus of about a quarter of the population.
  - Consequences:
    - GDP plummeted by 17 percent.
    - Central government current expenditure increased by 31 percent.
    - Fiscal deficit increased from 3.1 percent of GDP in 1978 to 8.1 percent of GDP in 1981 despite a sizable increase in foreign grant receipts.

### V. Policy Implications and Mitigation Strategies (summary points reported)
- Market insurance mechanisms are the ideal approach to managing natural disaster risk, but:
  - The market for natural disaster insurance is not well developed and is largely absent in many developing countries.
- Alternatives and complements:
  - Self-insurance by generating public savings in good times to cover potential increases in expenditure after natural disasters.
  - More appropriate building practices and preventive measures to substantially lessen exposure to natural hazards.
  - Increased preparedness and improved governance can affect reported human costs and resilience.

_Italic: Source — _wp04224 - References (extracted content).

### Box 1. Review of Literature on Macroeconomic Implications of Natural Disasters

### Box 1. Review of Literature on Macroeconomic Implications of Natural Disasters

### Immediate Macroeconomic Impacts
- Natural disasters are typically associated with an immediate contraction in economic output.
- Impact on same-year GDP growth ranges from very small to 20 percentage points or more (example: Dominica in 1979).
- Representative findings from studies of Latin America and the Caribbean:
  - Auffret (2003a): 1 percent of GDP in direct damage reduced same-year GDP growth by 0.5 percentage point.
  - Charvériat (2000): median damage 3 percent of GDP; same-year GDP growth fell in 28 of 35 events, with an overall median reduction of 1.7 percentage points.
  - Crowards (2000b): same-year GDP growth fell by an average of 3.1 percentage points following 21 major disasters.
- Evidence on effects beyond the contemporaneous drop is mixed; Caselli and Malhotra (2004) conclude disasters have no significant impact on the growth path.
- Natural disasters typically worsen external balances:
  - Disasters often increase imports (e.g., reconstruction materials) and reduce exports.
  - ECLAC (2000): 42 large events in Latin America and the Caribbean were, on average, associated with a deterioration in the balance of payments equal to about one-third of estimated damage.
  - Crowards (2000b): 21 major disasters led to an average worsening of the trade balance due to increased import growth and, to a lesser extent, reduced export growth.
  - Benson et al. (2001): dependence on agricultural exports is an important indicator of the magnitude of trade-balance deterioration.
- Natural disasters can deteriorate fiscal balances:
  - Emergency assistance and reconstruction raise government expenditure while tax revenue may shrink.
  - IMF (2003): five large exogenous shocks in Africa were associated with same-year increases in fiscal deficits of up to 3 percent of GDP.
  - Benson and Clay (2003a): in many cases disasters had very little impact on fiscal balances, possibly because countries are constrained by existing expenditure envelopes.
- Disproportionate impact on poverty:
  - Poor households often live in vulnerable areas and poorly constructed housing (World Bank, 2003).
  - Poor households have fewer assets and limited access to credit and are less able to cushion consumption shocks (IMF, 2003).
  - It is unclear how quickly affected households can recover.

### Evidence from ECCU (Figure 3) and Key Statistics
- Figure 3 presents median impacts of 12 large natural disasters in the ECCU, 1970–2002 (events with estimated damages exceeding 2 percent of GDP).
- Selected median changes (change of median from year -1 to year 0) shown in the figure:
  - Current Account Deficit (% of GDP): +10.8
  - Imports (Goods & Services, % of GDP): +12.7
  - Exports (Goods & Services, % of GDP): -4.9
  - Public Consumption (% of GDP) 2/: +2.2
  - Public Investment (% of GDP) 2/: +1.3
  - Agricultural Production (% change) 1/: -11.1
  - Central Gov. Revenue (% of GDP): -0.3
  - Central Gov. Deficit (% of GDP): +1.0
  - Change in Public Debt (% of GDP) 3/: +1.8
  - Official Assistance and Aid (% of GDP): +0.7
  - Investment (% of GDP) 2/: +2.9
  - Change of median from year -1 to year 0: -2.2

- Observations:
  - Deterioration in fiscal and external balances reflects expected borrowing by governments and households in response to temporary shocks.
  - Large impact on the current account deficit in ECCU reflects the region’s high degree of openness and access to international capital.
  - Reliance on capital markets poses vulnerability if access to financing suddenly dries up, making debt servicing difficult and potentially necessitating deep cuts in consumption.

### Long-Term Effects and Cross-Country Evidence
- Potential long-term channels:
  - Environmental damage to agriculture, fishing, and forestry (ECLAC, 2000).
  - Destruction of schools could reduce human capital stock.
  - Reconstruction may crowd out productive capital expenditure.
  - Increased indebtedness could raise interest rates and reduce investment.
  - Worsening fiscal and external balances could trigger inflation and/or financial crises.
- Empirical evidence on long-term effects is inconclusive:
  - Benson and Clay (2003b): proneness to natural disasters has a negative impact on long-term economic growth.
  - World Bank (2003): natural disasters have no significant impact on growth.
- Rank-correlation findings (Table 5):
  - Percentage of population affected is strongly associated with low levels of income.
  - Proneness to disasters—especially percentage of population affected—is associated with high volatility of income, consumption, and fiscal balances; a large agricultural sector; and a low investment-to-GDP ratio.
  - Number of recorded events divided by land area and percentage of population affected are both positively correlated with GDP growth (relationship not strongly significant and possibly driven by other factors).
- Volatility observations:
  - Caribbean exhibits very high consumption volatility, plausibly linked to disaster proneness.
  - World Bank (2003) cross-country regressions find natural disasters are not a significant determinant of consumption volatility.
  - Income volatility (standard deviation of annual real GDP growth) is not especially high in the Caribbean compared with other middle-income countries (Table 6).
  - Cashin (2004): filtering out business-cycle effects dramatically increases the volatility of real GDP growth in the ECCU relative to other countries.
  - High consumption volatility in the Caribbean likely reflects inadequate consumption-smoothing mechanisms: limited insurance use (Auffret, 2003a, 2003b); absence of counter-cyclical fiscal policy (World Bank, 2003); and generally high volatility in small states (Easterly and Kraay, 2000).
  - Natural disasters may have indirect impacts on aggregate volatility (e.g., disaster proneness impeding insurance market efficiency).

### Mitigating Disasters: Insurance and Capital Markets
- Insurance and capital markets can substantially mitigate disaster costs by compensating for loss of capital and income and reducing immediate consumption impacts.
- Current limitations of insurance markets for natural hazards:
  - Natural disasters are “high severity, low frequency” events, which are more difficult for insurers than “low severity, high frequency” risks (Pollner, 2001).
  - Objective information on damage and risk is difficult to obtain.
  - Catastrophe-risk insurance markets are inefficient: high price of coverage, excessive volatility, and insufficient pooling of risk.
- Potential improvements:
  - More efficient risk-sharing could use capital markets to spread exposure over a larger number of investors.
  - Emergence of catastrophe bonds in advanced markets could help, but these instruments are still not very widespread (Box 2).
- Many vulnerable countries, including ECCU members, have poorly functioning insurance and capital-market mechanisms.

*Source: Box 1. Review of Literature on Macroeconomic Implications of Natural Disasters (from _wp04224).*

### Box 2. New Instruments for Dealing with Natural Hazard Risk

### Box 2. New Instruments for Dealing with Natural Hazard Risk

### Capital-market instruments and catastrophe risk transfer
- Catastrophe bonds (cat bonds) are prominent among new instruments for weather- and disaster-related risks; other instruments include exchange-traded catastrophe options, catastrophe swaps, and weather derivatives.
- Cat bonds offer high yields but are subject to default if a covered catastrophe occurs during the life of the bond.
- Securitizing catastrophe risk enables the risk to be spread more widely, improving the efficiency of risk transfer.
- Example application for governments:
  - A government could issue a cat bond to protect against a major hurricane.
  - Proceeds would be invested in risk-free securities; the spread between proceeds and risk-free returns represents the recurring cost of insurance.
  - If the specified hurricane occurs, the government would default on the cat bond and use the invested funds to cover reconstruction costs.
  - To minimize ambiguity, the bond should be tied to objective criteria such as wind speed or flood height at a specified location.
- Status and potential:
  - Cat bonds and similar instruments are still in their infancy and have so far been used only in developed countries.
  - They could potentially help developing countries obtain large-scale protection against natural hazard risk.

### Insurance market shortcomings in developing countries and the ECCU
- Global/regional coverage comparisons:
  - Latin America and the Caribbean had only 3.9 percent of 1985–99 natural disaster damage covered by insurance—compared with 34.5 percent in North America (Charvériat (2000)).
- ECCU-specific statistics and characteristics:
  - Total property insurance premiums in the ECCU are about 2.4 percent of GDP compared with 3.3 percent in the U.S.
  - Base property insurance rates in the ECCU countries are about double the rate prevailing in less hurricane-exposed cities in the United States (Pollner, 2001).
  - Expense ratios of local insurance companies in the Eastern Caribbean are 30-40 percent of premium income, compared with the U.S. average of 26-28 percent (Pollner, 2001).
  - About 80 percent of gross property insurance premiums are transferred to reinsurers, leaving the East Caribbean market highly exposed to the volatile global reinsurance market.
  - Example volatility of local insurance costs after foreign catastrophes: annual cost of insurance rose from 0.4 percent of insured value in 1990 to 1.3 percent in 1994, and declined to 0.7 percent in 1998.
  - Insurance coverage is highly uneven: the vast majority relates to large commercial businesses (especially tourism); many private dwellings—particularly low-income households—are uninsured.
  - Crop insurance is not always available; WINCROP (Windward Islands Crop Insurance) provides cover only against about 20 percent of losses but has helped growers rehabilitate quickly.

### Domestic public policy to reduce risk and lessen impact
- Improve insurance market functioning to increase coverage and reduce economic volatility:
  - Government property could be insured more widely, possibly using cat bonds or other financial innovations.
  - Policies to encourage wider insurance of dwellings and crops—particularly in low-income communities—would be beneficial.
  - Strengthening financial regulation would improve insurance products and attract a wider segment of the economy.
- Risk-reduction investments and building standards:
  - Very modest investments can substantially reduce structural vulnerability.
  - One estimate: investments of US$40 billion in disaster preparedness, prevention, and mitigation would have reduced global economic losses in the 1990s by US$280 billion (Freeman et al., 2003).
  - Simple measures such as tying walls to foundations and roofs to walls may dramatically increase buildings’ resistance to hurricanes (Pollner, 2001).
  - Well-designed and strictly enforced building codes and zoning regulation are central to appropriate construction methods for the local environment.
  - Implementing hurricane-resistant home improvement programs in the informal sector can have very positive results.
  - Governments should refrain from subsidizing monoculture; diversification within agriculture and from agriculture to other sectors lessens concentration of risk.
- Administrative and financial preparedness:
  - Administrative initiatives: prepare emergency procedures and social safety nets.
  - Financial preparedness: when market insurance is not available, risk-averse governments should each year save an amount equal to the expected cost of disasters (Freeman et al., 2003).
  - Accumulation of contingency funds, such as those held at the Eastern Caribbean Central Bank (ECCB), is an obvious channel.
  - For countries with very high debt levels, precautionary savings may be better used to pay down existing debt.
  - ECCB fiscal reserve account: contributions mandatory, automatically deducted from profits owed to each member country; currently holds about EC$12 million and has never been used in relation to a natural disaster.

### International assistance and cooperation
- Official development assistance and multilateral institutions increasingly devote resources to emergency assistance, but:
  - Rapid increase in frequency of natural disasters suggests a need for increasing effort.
  - External assistance has concentrated on a few very visible events; smaller disasters may receive too small a share.
  - Cooperation among agencies is important given small individual assistance amounts.
- IMF instruments and usage:
  - IMF instruments for natural disasters include emergency assistance for natural disaster (EAND), compensatory financing facility, stand-by arrangements, and PRGF arrangements.
  - EAND has been used 27 times since 1962.
  - EAND is relatively quick (usually within two or three months), with relatively little conditionality, and can act as a catalyst for other donor flows.
  - Available resources are relatively limited: the total financing given in the six cases where ECCU countries accessed EAND was only US$16 million, less than 2 percent of the estimated damage.
  - Compensatory financing facility is more directed at export shortfalls; Stand-By and PRGF arrangements permit greater amounts but are slower, subject to conditionality, and not geared toward natural disaster problems.
- Regional programs of relevance to ECCU:
  - Caribbean Development Bank (CDB): disbursed US$50 million in loans for 27 operations during 1998–2001 (assistance for disaster relief, mitigation, and preparedness projects).
  - World Bank: disbursed more than US$30 million in the region during 1998–2001 (largely for disaster management and emergency recovery projects).
  - Caribbean Disaster Emergency Response Agency (CDERA): established in 1991 to provide immediate, coordinated response; engaged in disaster-management services ranging from local information campaigns to logistical support for relief supplies.

### Summary of findings (selected points)
- On average, natural disasters affect about 2 percent of a country’s population each year and cause damage amounting to well over one-half of 1 percent of GDP.
- The incidence is especially pronounced in developing countries, with the ECCU countries among the most vulnerable in the world in terms of frequency of events.
- Natural disasters are typically associated with an immediate contraction in economic output, a worsening of external and fiscal balances, and an increase in poverty; effects are pronounced in the ECCU.
- Despite vulnerability, insurance plays a limited role in developing countries; ECCU insurance market has high expense ratio, high fragmentation, high volatility, and a small capital base.
- Modest preventive investments can substantially mitigate impacts; tighter fiscal policy during good times would leave more room for emergency expenditure increases.

*Source: Box 2. New Instruments for Dealing with Natural Hazard Risk (excerpt of IMF working paper content).*

### REFERENCES

### _wp04224 - REFERENCES

### References on vulnerability, natural disasters, and small states
- Atkins, J.P., S. Mazzi, and C.D. Easter, 2000, “A Commonwealth Vulnerability Index for Developing Countries: The Position of Small States,” Economic Paper No. 40 (London: Commonwealth Secretariat).
- Auffret, P., 2003a, “High Consumption Volatility: the Impact of Natural Disasters,” World Bank Working Paper No. 2962 (Washington: World Bank).
- Auffret, P., 2003b, “Catastrophe Insurance Market in the Caribbean Region: Market Failures and Recommendations for Public Sector Interventions,” Policy Research Working Paper No. 2963 (Washington: World Bank).
- Benson, C. and E. Clay, 2003a, Economic and Financial Impacts of Natural Disasters: an Assessment of Their Effects and Options for Mitigation (London: Overseas Development Institute).
- Benson, C. and E. Clay, 2003b, “Disasters, Vulnerability and the Global Economy,” in A. Kreimer, M. Arnold, and A. Carlin (Eds.), Building Safer Cities: The Future of Disaster Risk (Washington: World Bank).
- Benson, C., F.V. Michael, and A.W. Robertson, 2001, “Dominica: Natural Disasters and Economic Development in a Small Island State,” Disaster Risk Management Working Paper Series No. 2 (Washington: World Bank).
- Caselli, F. and P. Malhotra, 2004, “Natural Disasters and Growth: from Thought Experiment to Natural Experiment,” Unpublished Draft, International Monetary Fund.
- Cashin, P., 2004, “Key Features of Caribbean Business Cycles,” IMF Working Paper WP/04/136 (Washington: International Monetary Fund).
- Charvériat, C., 2000, “Natural Disasters in Latin America and the Caribbean: An Overview of Risk,” Working Paper No. 434 (Washington: Inter-American Development Bank).
- Collier, P., and J. Dehn, 2001, “Aid, Shocks, and Growth,” World Bank Working Paper No. 2688 (Washington: World Bank).
- Crowards, T., 2000a, “An Index of Inherent Economic Vulnerability of Developing Countries,” Staff Working Paper No. 6/00 (St. Michael, Barbados: Caribbean Development Bank).
- Crowards, T., 2000b, “Comparative Vulnerability to Natural Disasters in the Caribbean,” Staff Working Paper No. 1/00 (St. Michael, Barbados: Caribbean Development Bank).
- Crowards, T., and W. Coulter, 1998, “Measuring The Comparative Vulnerability of the Eastern Caribbean,” Working Paper (St. Michael, Barbados: Caribbean Development Bank).
- Easterly, W., and A. Kraay, 2000, “Small States, Small Problems? Income, Growth, and Volatility in Small States,” World Development, Vol. 28, pp. 2013–2027.
- Economic Commission for Latin America and the Inter-American Development Bank (ECLAC), 2000, “A Matter of Development: How to Reduce Vulnerability in the Face of Natural Disasters” (Port-of-Spain, Trinidad and Tobago).
- Freeman, P.K., M. Keen, and M. Mani, 2003, “Dealing with Increased Risk of Natural Disasters: Challenges and Options,” IMF Working Paper WP/03/197 (Washington: International Monetary Fund).
- Intergovernmental Panel on Climate Change, 2001, “Third Assessment Report - Climate Change 2001” (Geneva, Switzerland).
- Pollner, J., 2001, “Managing Catastrophic Disaster Risk Using Alternative Risk Financing and Pooled Insurance Systems,” World Bank Technical Paper No. 495 (Washington: World Bank).
- World Bank, 2003, “Caribbean Economic Overview 2002: Macroeconomic Volatility, Household Vulnerability, and Institutional and Policy Responses,” Report No. 24165-LAC (Washington: World Bank).

### Data sources, policy notes, and web resources
- Centre for Research on the Epidemiology of Disasters (CRED), 2004, “EM-DAT: The OFA/CRED International Disaster Database,” http://www.em-dat.net/.
- International Monetary Fund, 2003, “Fund Assistance for Countries Facing Exogenous Shocks,” http://www.imf.org/external/np/pdr/sustain/2003/080803.pdf.
- United Nations, 2000, “Committee for Development Policy’s Economic Vulnerability Index: Explanatory Note,” http://www.un.org/esa/policy/devplan/cdp00p21.pdf

*Source: _wp04224 - REFERENCES (PDF chapter/section).*

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