Government Insurance Against Natural Disasters: An Application to the ECCU

Author/Editor:

Alejandro D Guerson

Publication Date:

December 4, 2020

Electronic Access:

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Summary:

This paper estimates insurance requirements against natural disasters (NDs) in the Eastern Caribbean Currency Union (ECCU) using an insurance layering framework. The layers include a government saving fund, as well as market instruments. Each layer is calibrated to cover estimated fiscal cost of NDs according to intensity and expected damage. The results indicate that ECCU countries could target saving fund stocks for relativelly smaller and more frequent events in the range of 6-12 percent of GDP, enough to cover 95 percent of NDs’ fiscal costs. To ensure financially-sustainable saving funds with a low probability of depletion, this requires annual budget savings in the range os 0.5 to 1.9 percent of GDP per year. Additional coverage could be obtained with market instruments for large and less frequent events, albeit at a significant cost.The results are based on a Monte-Carlo experiment that simulates natural disaster shocks and their impact on output and government finances.

Series:

Working Paper No. 2020/266

Frequency:

regular

English

Publication Date:

December 4, 2020

ISBN/ISSN:

9781513563329/1018-5941

Stock No:

WPIEA2020266

Format:

Paper

Pages:

25

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