## Government Insurance Against Natural Disasters: An Application to the ECCU

_IMF Working Papers, December 4, 2020_

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## Bibliographic details
- Authors: Alejandro D Guerson
- Published: December 4, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513563329.001

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### Methodology
- 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.

### Key findings
- 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.

### Quantitative requirements and outcomes
- 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.

### Policy implications and recommendations
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2020/12/04/government-insurance-against-natural-disasters-an-application-to-the-eccu-49925_