Private Enterprise and Financial Markets > Environment > Disaster Risk Management
Exploiting International Financial Markets to Manage Natural Hazard Risks in LA
By Ivar Pettersen, John Magne Skjelvik, Nils Atle Krokeide (12/05, ENV-146, En, Es)
Natural hazards present important challenges for the attainment of the social and economic development goals of the countries in Latin America. The costs of disasters are increasing and exacerbated by a regional underinvestment in prevention and mitigation, and the lack of financial protection strategies. Post-disaster financing of damage creates a serious drag on development, contributing often also to greater vulnerability to future events. Policymakers in the region recognize that their economies may be seriously affected because post-disaster investments for reconstruction may cause increased indebtedness, potentially higher inflation, and dampened investment in important geographical areas and sectors not included in reconstruction. Post-disaster borrowing causes development priorities such as poverty reduction efforts, public health, education, and other social goals to be sacrificed.
Some countries in Latin America and the Caribbean have established specific financial protection strategies to meet disaster-related expenditures. Financial instruments are available to meet hazard losses. They include budgetary transfers, use of reserve funds, contingent credit and insurance. More advanced techniques such as catastrophe bonds, weather derivatives, and index-based (parametric) insurance are not yet widely used to manage disaster risk in the region, but are receiving increased interest.
This technical paper analyzes the potential practical application of financial instruments for natural hazard risk finance and transfer in Latin America. The study first presents an overview of the role of financing and risk transfer in disaster risk management. It then investigates the sources of natural hazard risk and presents use of financial instruments for managing risk for the cases of Chile, El Salvador and Peru. The document also discusses the role donors and multilateral development banks should have in supporting disaster risk financing in the region.
This publication follows the path outlined in the Action Plans of 2000 and 2005 for Disaster Risk Management. It will create awareness in the Bank and among its member countries, of the opportunities for risk financing and transfer involving both public and private sectors, particularly in Chile, El Salvador and Peru. We hope that the publication will be useful to officials from ministries with responsibilities in areas such as finance, planning and civil protection as well as to Bank staff working in disaster risk management to support the development strategies of its borrowing member countries.
Last updated: 06/12/07
