Government Insurance Against Natural Disasters: An Application to the ECCU

IMF Working Papers, December 4, 2020

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Uses an insurance layering framework comprising a government saving fund and market instruments.
Each layer is calibrated to cover estimated fiscal cost of natural disasters (NDs) according to intensity and expected damage.
Results are based on a Monte-Carlo experiment that simulates natural disaster shocks and their impact on output and government finances.

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 for large and less frequent events could be obtained with market instruments, albeit at a significant cost.

Target saving fund stock range: 6-12 percent of GDP.
Coverage probability associated with that stock range: 95 percent of NDs’ fiscal costs.
Required annual budget savings to sustain funds: 0.5 to 1.9 percent of GDP per year.

Establish government saving funds sized to cover smaller, more frequent NDs at the 6-12 percent of GDP range to achieve 95 percent coverage of fiscal costs.
Implement annual budget savings in the range os 0.5 to 1.9 percent of GDP to maintain financially sustainable saving funds with a low probability of depletion.
Use market instruments to extend coverage for large, less frequent events, recognizing that such instruments carry significant costs.