Publication: Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing
Date
2007-09
ISSN
Published
2007-09
Author(s)
Ghesquiere, Francis
Mahul, Olivier
Abstract
Economic theory suggests that countries
should ignore uncertainty for public investment and behave
as if indifferent to risk because they can pool risks to a
much greater extent than private investors can. This paper
discusses the general economic theory in the case of
developing countries. The analysis identifies several cases
where the government's risk-neutral assumption does not
hold, thus making rational the use of ex ante risk financing
instruments, including sovereign insurance. The paper
discusses the optimal level of sovereign insurance. It
argues that, because sovereign insurance is usually more
expensive than post-disaster financing, it should mainly
cover immediate needs, while long-term expenditures should
be financed through post-disaster financing (including ex
post borrowing and tax increases). In other words,
sovereign insurance should not aim at financing the
long-term resource gap, but only the short-term liquidity need.
Citation
“Ghesquiere, Francis; Mahul, Olivier. 2007. Sovereign Natural Disaster Insurance for Developing Countries : A Paradigm Shift in Catastrophe Risk Financing. Policy Research Working Paper; No. 4345. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/24c7235f-6a5d-5df9-91ba-d5e218bbc19d License: CC BY 3.0 IGO.”
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